Wyoming LLC as a DAO Legal Wrapper: What You Need to Know
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 should you consider other ones.
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.
All right, let's dive in.
Why may Wyoming work for your DAO?
As the Marshall Islands, Wyoming has drafted special regulation for DAO, under which the DAO could be established in Wyoming in the form of the LLC with certain peculiarities. From our point of view, the advantages of this jurisdiction are:
- The flexible legal system of the U.S. common law;
- Easy and not expensive establishment process;
- Quite a quick setup: it takes up to 2 weeks to register a company;
- Your project will be structured in the U.S., the investment "Meca";
- It's one of the first working legal regulations of the wrapper for the DAO;
- As stated above, the DAO LLC could be profitable in comparison to the 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;
- Less bureaucracy and paperwork: very simple registration process with minimum documents.
It's considered best not to establish DAO LLC in Wyoming for investment DAO creation due to the strict securities regulation 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. This LLC is usually recommended as a pure governance DAO for your project due to the transparent and specifically designed regulation.
How does Wyoming DAO LLC work?
The main concern with 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 LLC) 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 except that the 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 the other 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 our case of a DAO LLC, the members have no such duties to the DAO LLC and, therefore, more freedom for their business activity.
How does decentralized governance work in 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 preempt any conflicting provisions. But where the articles of organization and smart contract conflict, the smart contract shall preempt any contradictory provisions of the articles.
Taking this into account, you should very clearly and 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 special regulations for DAO, and the 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;
- activities of the DAO LLC and the conduct of those activities, etc.
Registering a Wyoming LLC for DAO
First of all, the 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 or conformed 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
In case you need the Legal Wrapper for DAO and are planning, among other things, to accumulate profits or distribute them among DAO members, you may consider Wyoming DAO as an option. The main benefits of this jurisdiction are investment attractiveness, simplicity, speed and flexibility.
Book a Jurisdiction Discovery Session with one of Legal Nodes experts to learn more about this option and compare it with other possibilities of DAO Legal Wrappers. During the 1-hour session, you will get:
- 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.