Wyoming LLC as a DAO Legal Wrapper: What You Need to Know
Wyoming LLC as a DAO Legal Wrapper: What You Need to Know
Most online guides on the Wyoming LLC for DAO incorporation focus on providing information on how to register a company as a Wyoming LLC for DAO purposes. As useful as this information is, it’s hard to make an informed decision on whether the Wyoming option is the best choice for your DAO, or whether they may be more suitable options offered by alternative jurisdictions.
We've created this guide to help you answer that question. By the end of the article, you should have a much clearer understanding as to whether the Wyoming LLC could work for your DAO Legal Wrapper. We’ll explore the advantages and limitations of this legal entity, and also help you better understand how it works for a DAO from a legal standpoint.
If you're still learning about the different options for DAO incorporation, you may want to start by checking out our guide on the best countries for incorporating a DAO. We’ve also provided detailed overviews of both the Cayman Islands Foundation and the Marshall Islands LLC as DAO Legal Wrappers.
Please note, everything contained in this article is for informational purposes only and is not to be considered as legal advice or legal opinion.
This article is brought to you by the Legal Nodes team. Legal Nodes is a legal platform that helps global businesses and Web3 projects solve cross-border legal tasks and stay compliant. We’ve helped many DAOs create and implement legal structures. Speak to us to get started with DAO legal structuring.
What is a Wyoming DAO LLC?
The Wyoming DAO LLC is a relatively new type of entity introduced in March 2021 by the passing of a DAO Supplement in the Wyoming senate. An LLC needs to have a statement that the company is a DAO in its articles of organization, in order to be considered a DAO LLC under this DAO Supplement.
An LLC is a business structure in the U.S. (and throughout the world) that protects its owners from personal responsibility for the company's debts or liabilities.
A DAO LLC, when in place, helps to protect DAO members from unlimited liability for any DAO’s actions. It also helps the DAO to interact with the outside (off-chain) world, for example to enter into contracts, and to manage the DAO Treasury in a compliant manner.
Does this regulation make DAOs ‘legal’ in Wyoming?
The state of Wyoming, along with the states of Tennessee and Vermont, recognises DAOs as legal entities. DAOs, like any other LLCs, may form and operate for any lawful purpose, no matter if they’re for-profit or not-for-profit.
As of March 2023, there are more than 800 entities in Wyoming LLC registry that contain “DAO” in their name, though can be considered as DAO legal entities.
💡 Worth checking: Launching a DAO: 3 Stages of Legal Works
What are the advantages of Wyoming DAO LLC?
From our point of view, the advantages of this US jurisdiction for incorporating DAOs include:
- the flexible legal system of the U.S. common law;
- easy and relatively inexpensive establishment process;
- quite a quick setup—a company can be registered in as little as 2 weeks;
- your project will be structured in the U.S., which is considered an investment Mecca;
- Wyoming offers one of the first working legal regulations for a DAO wrapper;
- the DAO LLC could be profitable in comparison to a DAO legal framework on the Marshall Islands, where a DAO could only be non-profit (its profit could not be distributed among members);
- limitation of personal liability: the DAO LLC members are not personally liable for the LLC's debts or legal liabilities;
- "pass-through" taxation system: the DAO LLCs receive "pass-through" treatment allowing allocated profits to be taxed only once on each member's individual income tax return; and
- less bureaucracy and paperwork as the registration process is very simple with minimal documentation required.
What type of DAOs is the Wyoming DAO LLC suitable for?
Establishing a DAO LLC in Wyoming for the purpose of creating an investment DAO is not considered a great option due to the strict securities regulations in the U.S. There is a risk that your token (if publicly issued) will be deemed as a security by the U.S. Securities and Exchange Commission.
Instead, the Wyoming DAO LLC is usually recommended to be used as a pure governance DAO, due to the transparent and specifically designed regulation behind it.
What are some of the limitations of a Wyoming DAO LLC?
In the current legislation, a DAO LLC in Wyoming should identify the public keys of smart contracts that will be used in its management and operations. This might become problematic for DAOs that incorporate before finalizing or deploying their smart contracts.
Also, a DAO LLC formed under Wyoming laws will have to dissolve if the DAO “failed to approve any proposals or take any actions” in a one-year period. This requirement might not be suitable for some DAOs that don’t often vote on decisions (like some of the protocol DAOs).
Lastly, the Corporate Transparency Act that applies to all LLCs will also apply to a DAO LLC in Wyoming. That means that a DAO will have limitations on preserving the anonymity of its members. Consider this, as well as all the other factors mentioned above, when evaluating if a Wyoming DAO LLC might work for you DAO.
You can also check the flow below to compare a Wyoming DAO LLC with other legal entities that work for DAO registration.
How does a Wyoming DAO LLC work?
The management of the Wyoming DAO LLC must be vested in its members if it's member-managed (similar to the classical model of LLCs). Alternatively, if its’ managed algorithmically, the DAO LLC management must be vested in the smart contract (similar to the classical DAO model, where decision-making is encoded in the protocol). Whether it is member-managed or managed by smart contracts, the management method should be indicated in the articles of organization.
For the most part, no member of the DAO LLC shall have any fiduciary duty to the organization or any member. The exception being that members will usually be subject to the implied contractual covenant of good faith and fair dealing (unless otherwise specified in the articles of organization or operating agreement).
Fiduciary duty requires that a particular person works in another person's best financial interest in certain circumstances. For example, directors of corporations (or managers of LLCs) are charged with certain fiduciary duties in fulfilling their managerial responsibilities. The primary duties are the duty of care and the duty of loyalty. In the case of a DAO LLC, the members have no such duties to the DAO LLC and, therefore, have more freedom when undertaking their business activities.
How does decentralized governance work in a Wyoming DAO LLC?
Articles of organization and smart contracts take the role of the operating agreement in the DAO LLC in terms of what they govern. But, to the extent that the articles of organization or smart contract do not otherwise provide for, an operating agreement may supplement the operation of the DAO LLC. Under the applicable law, an algorithmically managed DAO LLC may only form if the underlying smart contracts can be updated, modified or upgraded.
The articles of organization and the operating agreement of the DAO LLC are effective as statements of authority. Where the articles of organization and operating agreement conflict, the articles of organization shall take precedence over any conflicting provisions. But where the articles of organization and smart contract conflict, the smart contract shall take precedence over any contradictory provisions of the articles.
Taking this into account, it is wise to very clearly and very consistently "build" the governance and management provisions in all the constitutional instruments of your DAO LLC, which includes the smart contract, articles of organization, and operating agreement.
Each article of organization of the DAO LLC must contain certain statements about the DAO, the wording of which you may find in the special regulations for DAOs. It must also include information on:
- the rights and voting rights of members;
- transferability of membership interests;
- relations among the members and between the members and the DAO LLC; and
- activities of the DAO LLC and the conduct of those activities, etc.
📚 Read more: Designing a governance system for a DAO: a checklist for Web3 founders
How to register a Wyoming LLC for your DAO
A DAO LLC may be formed by either establishing a new legal entity or converting an existing LLC to a DAO LLC by amending its articles of organization to include the statement provided for in the relevant regulation.
Any person may form the DAO LLC (which must have at least one member) by signing and delivering one original and one exact duplicate or verified copy of the articles of organization to the secretary of state for filing. The person forming the DAO LLC should not be a member of the DAO LLC. You can deliver these documents either online or by mailing the paper form. Each DAO LLC must also have a registered agent.
Getting started with your DAO Legal Wrapper
If you need a Legal Wrapper for your DAO and are planning, among other things, to accumulate profits or distribute them among DAO members, you may want to consider Wyoming as an option. The main benefits of this jurisdiction are investment attractiveness, simplicity, speed, and flexibility.
Legal Nodes helps Web3 founders build DAO Legal Wrappers in multiple jurisdictions, including Wyoming, USA. Speak to us today to learn more about how Legal Nodes can help you.
Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.