Wyoming LLC as a DAO Legal Wrapper: What You Need to Know

June 23, 2022
TABLE OF CONTENTS

Wyoming LLC as a DAO Legal Wrapper: What You Need to Know

June 23, 2022

Most online guides on the Wyoming LLC for DAO incorporation provide only the information on registering the company as a Wyoming LLC for DAO purposes. It's hard to use this information to make an informed decision on whether to choose this option for your DAO or whether they may be more suitable options offered by alternative jurisdictions. 

We've created this guide to help you answer whether Wyoming LLC could work for your DAO Legal Wrapper—as it has its advantages and limitations—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, check out our guide on the best countries for incorporating a DAO. We’ve also provided detailed overviews of the Cayman Islands Foundation as a DAO Legal Wrapper and the Marshall Islands LLC as a DAO Legal Wrapper

All right, let's dive in.

Why might Wyoming work for your DAO? 

Like the Marshall Islands, Wyoming has drafted a special regulation for DAO, under which a DAO can be established in Wyoming in the form of an LLC, with certain characteristics. From our point of view, the advantages of this US jurisdiction 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;
  • as stated above, 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.

However, 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 as a pure governance DAO for your project, due to the transparent and specifically designed regulation. 

How does a Wyoming DAO LLC work?

The main concern with a DAO is that your DAO, if you have no proper legal wrapper, could be recognized as a general partnership, exposing its members to personal liability for any of the DAO's actions and obligations. At the same time, 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.

Management of the DAO LLC must be vested in its members (similar to the classical model of LLCs) if it's member-managed, or in the smart contract if it's algorithmically managed (similar to the classical DAO model, where decision-making is encoded in the protocol). 

No member of the DAO LLC shall have any fiduciary duty to the organization or any member with the exception that members shall be subject to the implied contractual covenant of good faith and fair dealing or 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 for their business activity.

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 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 otherwise 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: smart contract, articles of organization, and operating agreement. 

Each article of organization of the DAO LLC must contain certain statements about 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.

Registering a Wyoming LLC for DAO

First of all, 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. 

Book a Jurisdiction Discovery Session with the Head of Web3 Legal at Legal Nodes to learn more about this option and compare other options  for DAO Legal Wrappers. During the session, you will be given:

  • an intro to crypto-friendly countries–specifically which ones may be the best jurisdictions for your DAO;
  • an intro to token legal design to better understand all the implications of issuing a token; and 
  • a checklist of all to-do's to launch your own DAO Legal Wrapper.

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.

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Taras is a Web3-focused Virtual Legal Officer at Legal Nodes. Since 2018, he has had various projects under his belt, ranging from M&A transactions and ICO management to handling matters concerning Ukrainian laws on virtual assets. Taras loves writing helpful guides on Web3 legal topics and draws his inspiration from doing sports and reading books (his passion is the history of the 20th century).

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