Nov 1, 2021
What is a ‘General Partnership’ and Why Does a DAO So Often Get Classified As One?
Imagine this, there is a way where people can be organized all around the globe, without personally knowing each other, establishing their own rules and making their decisions autonomously which is encoded on a blockchain. This is not a mere imagination but DAOs are indeed making it a reality.
However, the legal framework around blockchain and DAOs are still in a developing stage. Therefore, it is difficult to ascertain the rights and liabilities of DAOs from a legal point of view. One of the major drawbacks that they face is their classification as a “General Partnership”.
As a progressive step, the state of Wyoming, USA, has passed a law which allows DAOs to be registered as Limited Liability Companies (LLCs). The implications of this has been covered in a previous blog post which can be accessed here. However, the rest of the world is yet to catch up with this train of thought. This blog post explains briefly the implications of DAOs being loosely classified as “General Partnerships”.
What is a General Partnership?
It is an established position in law that an association of two or more persons to generate profits is a partnership. Broadly, a partnership may be defined as a business shared by multiple owners. It does not have to be a separate legal entity. It is immaterial whether this association has been formed as a DAO, a smart contract or a distributed ledger protocol. The issue with this form of association is that the risks and liabilities involved in it are unlimited. All partners are each indefinitely liable for the partnership’s debt. The liabilities for each partner cannot be limited due to ethical reasons.
Some of the other notable features of a “General Partnership” are :
- The death of one of the partners can result in the winding up of the entire partnership.
- The partners are not authorized to sell or give away their stakes without the agreement of other partners.
- All decisions must be taken unanimously.
What are the disadvantages of a General Partnership?
This is a widely accepted form of business and incorporated by many successful businesses. Nonetheless, it is not ideal for DAOs as it risks the members being entangled with innumerable legal and compliance issues. Broadly, some of the major disadvantages are:
- It is not a separate legal entity, hence they cannot enter into contracts.
- The partners are jointly and severally liable.
- If the partnership goes bankrupt, the partners are also declared bankrupt.
Conclusion
The legal framework around the world is slowly changing and adapting to new technical advancements including the ever-increasing use of blockchain and formation of DAOs. The state of Wyoming and Malta has passed laws that recognize DAOs and clarifies their legal standing. Till the time the world catches up, WACEO is here to help emerging and existing blockchain organizations.
WACEO as a non-profit organization helps blockchain organizations to be legally compliant. It enters into contracts on behalf of blockchain organizations with service providers. It also provides support to stakeholders in the form of contracts, policies and procedures.
For more information on WACEO and our work and to keep yourself updated on the latest developments in blockchain organizations, visit our website.
