DAOs do not fit into the traditional definition of a company, as it allows groups of people of any size to unify for a common purpose with little strife. Their purposes are not limited to but include charity, business and community organizations. These structures are growing rapidly as they enable people from all around the world to act collectively and organize effectively.
However, while it sounds very tech forward, they run into several compliance and legal issues quickly. These issues emerge from the fact that the laws around securities, corporate structure, liability and business do not consider and apply to DAOs.
DAOs are relatively new as they did not exist prior to the blockchain era. The legal framework worldwide is striving to adjust to this innovation. While we can expect that the laws will eventually adapt, early adopters are at a risk of running into compliance and legal disputes.
However, in one of the recent developments for the blockchain industry, the state of Wyoming has passed a bill named the DAO Supplement clarifying the status of DAOs. This bill applies the Wyoming LLC Act to the DAOs and gives them the legal status as a Limited Liability Company. This article aims to examine the implications of this bill and analyze its possible impact for the future of the blockchain industry.
Decoding The DAO Supplement
According to the general corporate law around the world, a DAO forms a general partnership. This has many drawbacks and puts unlimited liability on its members. The members are fully and personally responsible for all the actions of the said partnership and other partners. All the partners are severally and jointly liable.
On the other hand, an LLC or Limited Liability Partnership limits the liability to the entity itself. This means that the shareholders, members or partners of the said entity are bearing the risk that is limited to their contribution to said entity and percentage of the assets that their ownership stake entitles them to.
The Wyoming DAO supplement bill became a law on July 1, 2021. It is the first regional government organization to regulate DAO. This is a welcome change and quick adaptation to this new emerging technology and offers many benefits to DAOs. The benefits are as follows:
- Limited personal liability: the members or shareholders of an entity are not personally liable for LLC’s debts or legal obligations.
- Avoidance of double taxation & pass-through deduction: Generally, standard corporations are taxed twice. Firstly, the profits of the corporation are taxed and then income tax is levied upon the dividends received by the shareholders. However, LLCs receive a special treatment and are taxed only once on each member’s individual income tax return. Further, LLC owners may be able to deduct 20% of their business income with the 20% pass-through deduction allowed under The Tax Cuts & Jobs Act.
- Decreased paperwork and administrative difficulties: The maintenance and establishment of LLC is simpler than other and less burdensome than other corporate entities. The establishment of an LLC can be done by filing an Articles of Association along with paying a fee to the secretary of state. The filing process typically includes the LLC’s names, location of the principal office, the identity of its members, planned duration of the business and any other information that is required by the law.
Furthermore, some other notable features of this supplement are:
- A much more flexible management structure than permitted for traditional corporate forms of entities.
- Default specific roles to DAOs.
- Permission for DAOs to be either member or algorithmically managed.
- Recognition of smart contracts as the primary governing document for the rights of the DAO members.
- Defined roles, duties and liabilities for members of the DAOs.
This formal legal step is a progrresive step towards and is expected to solve the issues of member liability. However, it would not fully protect these LLCs completely as the US Federal government and the governments around the world are yet to take similar steps for the recognition of DAOs as companies. In order to safeguard one’s interest, it is always suggested to be updated with the latest developments as it is constantly evolving.
WACEO is a non-profit organization with a mission to help blockchain organizations be compliant with the dynamic regulatory atmosphere. It not only helps DAOs with governance policies but also helps them with business-related services, including (but not limited to) legal work, accounting services, legal and regulatory audits, tax services, and even dispute resolution. WACEO is a one-stop shop for all services required by DAOs. Apart from providing basic services, it also helps DAOs incorporate and ensures compliance with the prevailing regulations.
For more information on WACEO and our work and to keep yourself updated on the latest developments in blockchain organizations, visit our website.