US Jurisdiction
Currently, the majority of investment DAOs use US legal entities, generally, Delaware limited liability companies, similar to traditional venture funds. A Delaware LLC can provide the DAO members with reduced liability for the debts of and financial claims against the DAO. A Delaware LLC was determined to be the best option at the time of the creation of the first “post-The DAO” investment DAO, The LAO, and was recommended by OpenLaw, a legal on-chain protocol.
Wyoming recently passed a DAO LLC structure that, in some ways, operates similarly to a Delaware LLC in acting as a liability blocker for DAO members. To make clear the unique status of a DAO, the Wyoming law requires that a DAO LLC be registered with “DAO”, “LAO”, or “DAO LLC” in its name (instead of the typical “LLC”) and maintain a registered agent in Wyoming, which helps solidify a constant presence of the DAO in “meatspace.” DAO LLCs are either classified as “member-managed” or “algorithmically managed”; the meaning “algorithmically managed” has been subject of some debate since the law’s adoption, but many people believe it’s intending to capture the fact that many of a DAO’s decisions are made via smart contract implementation and not the discretion of a small group of people.
The major differences between Wyoming DAO LLCs and Delaware LLCs are beyond the scope of this article but there are several write-ups available online - Lex Node’s Gabriel Shapiro article and Joshua Durham’s article for the Journal of Business & Intellectual Property Law are two thoughtful pieces that highlight some areas of improvement in the law.
https://lh5.googleusercontent.com/RrjnxehTH7hCPughH3fz-c0xZXSvy6u9ud3EQPnXmOXKV4ZoAa8Ta8V2sDqQhi5Bap1wnL3i7ObqOS6LLfaUanfRjzUiszNjhObzrw5ntxHC_JnD2ynaX62FM6b_t5w9OwWKfDMX
Figure 3. Wyoming LLC vs Delaware LLC Differences (note that this does not consider specifics of the Wyoming DAO LLC law that might differ from traditional LLCs)
Non-US Jurisdiction
There are several jurisdiction options for non-US-based venture DAOs. Switzerland and Singapore are the current crypto-friendly regulatory regimes and are home to the greatest number of cryptocurrency and blockchain firms.
https://lh5.googleusercontent.com/f8cavipmjezBkuDSKiTHDApj-XflsYELWGgLxnh19dzxCew1c7N_bsC3qfQe_qsnXdV7jMR-T2wQXSyu2t3ASij9ZkmuUPa3KjPphPylp7iiAu04Nl-jZQUt4hsIET2jm_VNI4X4
Figure 4. Non-US DAO Jurisdictions
The Cayman Islands Foundation Company operates like an incorporated trust while retaining the limited liability of a company. A Foundation Company can designate beneficiaries by class (i.e. “token holders” or “node operators”) and reward those beneficiaries. Because DAOs have no fixed location, a Foundation Company has no tax liability with the Cayman Islands and is globally tax-neutral.
Switzerland is one of Europe’s most crypto-friendly countries and is home to the Ethereum Foundation, Cardano, Solana, and Polkadot. A Swiss Association (“Verein”) has been used as the structure for the above-mentioned blockchain foundations and when combined with a charitable or non-profit entity, provides a tax-exempt entity. While a DAO entity has not yet been recognized, Swiss legal firm MME has drafted a Model Articles of Association for a Decentralized Autonomous Association (“DAA”) to operate as a Swiss Association.
The Lichtenstein Venture Cooperative (“LCV”) operates as a limited liability company that does not have an initial capital requirement. There are strict operational requirements including having a bank account which may make this structure unsuitable for DAOs.
Malta originally led all countries with its crypto-friendly government regulations. In July 2018, Malta passed a regulatory framework for blockchains and cryptocurrency called “The Digital Innovation Framework”. DAOs and smart contracts fall under the portion of the bill that define Innovative Technology Arrangements (“ITAs”). While recognizing blockchain protocols as ITA entities, the bill requires a service provider to run the ITA which is not feasible for many DAOs.
Singapore has a relatively crypto-friendly environment and is home to several crypto firms including CoinGecko, Kyber Network, BitGo, and KuCoin. While it does not have an explicit framework for recognizing DAOs, it has a neutral stance on crypto transactions and a zero capital gains tax regime on cryptocurrency