DAOs (Decentralized Autonomous Organizations) have reached an inflection point. They are holding digital assets worth billions of dollars. They are a recent form of organization using blockchain technology. But they have increasingly grown in popularity in various jurisdictions. However, their legal status remains uncertain. As an internet native entity, a DAO have numerous issues related to compliance, coordination, retainment of talent among others, which remain unsolved. With such uncertainties, the members are exposed to significant risks. To avert the risks, it is prudent to incorporate the DAOs to avoid member liability and have off-chain operations.

What is a DAO?

They are decentralised social networks, which are created as an organization governed through various smart contracts functioning autonomously without a central authority. They are internet based businesses, which are collectively owned and managed by their members. Their treasuries are in-built and they can only be accessed by the authority and approval of the group. They are democratic in nature and decisions affecting them are made by voting mechanisms.

Why Incorporate?

To operate a regime-less DAO or to operate an incorporated DAO remains one of heated debates. Many have been opting for the regime-less structure. But what are the hazards of doing so?

Regime-less DAOs

When the DAO is regime less, it means it can be legally pursued by targeting its members. Operating without the legal entity status does not translate to immunity. If the DAO is regime-less the developers and the members are at risk.

  • A regime-less DAO is like a General Partnership. That means it does not have a corporate form and it does not offer the members any shields from liability. Any member of a regime-less DAO can be held personally liable for the organization’s activities. Various types of activities by the DAO can lead to imposition of liability directly to the members.
  • A regime-less DAO cannot carry out off-chain operations. It cannot sign legal contracts. It cannot pay taxes or open a bank account. With such limitations it does not manage to achieve the goals of a DAO, which is to provide security for its members and to empower them with benefits.
  • They have problems with the payment of income tax yet they might be making profits.

Goals of the Structure

  • A Decentralized Autonomous Organization needs to operate in a manner that minimizes the risks of the token holders.
  • Limiting the liability of the users and the members.
  • Paying taxes within the applicable jurisdiction.
  • Operate through a decentralized system.
  • Being consistent with regulatory compliance.
  • To fulfil obligations, which are provided for Corporate Transparency laws.
  • Facilitate dis-intermediated transactions any time it is possible.

Explaining the Legal Framework for DAOs

DAOs can enter into transactions such as investment in venture funds, enter into contracts and start listing of tokens on an exchange. In such cases, the management will mostly have the obligation of answering the question of how the DAO has been incorporated. The interaction of the DAO and the outside world is complicated especially when there is legal wrapper.

a) Legal Wrappers

A legal wrapper is essential for the operation of DAOs. But what is it? It is the legal entity, which represents the DAO in the real world. The entity can be a b-corps, c-corps, or LLC. It deals with the non-automated transactions, which involve humans. They also engage in any filing that involves the government in the applicable jurisdiction. Legal wrappers also ensure decentralization.

Thus, there is a need to have knowledge on how one should approach the legal structure of the DAO. It calls for answering various questions. For instance, which country should be the best to choose from? Where should one start when establishing a DAO?

Such important issues are covered by establishing whether DAOs need legal wrappers and the best countries and entities are best for DAO incorporation.

b) Offshore Entities

DAOs use offshore entities for governance of tokens. The main approach is targeting the right favourable foreign jurisdiction in terms of taxes and privacy among other factors. The most common foreign jurisdictions for wrapping the DAO include the British Virgin Islands, Cayman Islands, Panama, Singapore, Switzerland, Marshall Islands, Liechtenstein and Wyoming.

c) Governance Tokens

They are the systems which have the economic value in the DAO. They are simply the digital assets, which represent voting power within a DAO. However, the governing of token also poses a legal challenge since they are multi-functional. Token holders act as partners and they owe each other a fiduciary duty.

Do I need to register a DAO?

If your DAO needs to engage with the outside world, the answer to the question of whether it has to be registered is yes! DAOs must be registered if they want to engage with other DAOs and companies. They also need to register if they issue tokens to the community. When they want to manage a Treasury they are supposed to be registered. When the DAO is not incorporated, it will be difficult for it to deal with investors, contractors, or other entities. Failure to incorporate also exposes the founders and members to personal legal liability.

What countries are best for incorporating a DAO?

There are various countries, which have been registered as the best option of incorporating a DAO. Some of the most popular jurisdictions include Marshall Islands, the US (Wyoming), Switzerland, the Cayman Islands, Liechtenstein, Singapore, Panama, and the British Virgin Islands.

Each jurisdiction has its own regulatory framework worth considering before making an informed decision on where to incorporate your DAO. As such, there is a need to explore the various criteria, which would inform one on where to incorporate their DAO.

Whether the Decentralized Autonomous Organization is for profit

If the DAO is meant for profit amongst the members, some of the preferable jurisdictions include Wyoming DAO LLCs in the US or the Panamanian Foundations.

Wyoming DAO LLC

The Wyoming DAO LLC is relatively new yet is increasingly becoming very popular. There are about 800 registered DAO in Wyoming. It is a creation of the DAO Supplement in the jurisdiction. The legal wrapper will have to indicate that it is a DAO. With the LLC status in the United States, the DAO members are exempted from liability. Besides, the legal wrapper makes it possible for the DAO to enter into transactions. It is a legal entity that can operate for any lawful purpose.

Why Wyoming is good

  • The US has a flexible common law legal system.
  • The process of setting up a DAO is relatively flexible and cheap.
  • 2 weeks on average are enough for the establishment and registration of a company.
  • Investment in the US is safeguarded by the good business environment.
  • The jurisdiction has a working legal regulation for DAO wrapper.
  • Members have limited liability for the debts and legal liabilities.
  • There is no double taxation.
  • Simple paperwork during the registration process.

Limitations of Incorporating a DAO in Wyoming

Various limitations exist, which would make one reconsider incorporating their DAO in Wyoming and consider other options. For instance, it is not legally allowed for members and owners of the DAO to incorporate it in the jurisdiction without deploying the smart contracts. Wyoming DAOs must also approve proposals to take actions. Otherwise you cannot incorporate a protocol DAO since that kind does not vote on decisions.

It will be deemed to be dissolved if it does not approve proposals for one year.

Finally, the DAO LLC does not fully enjoy anonymity of its members. DAO LLCs are subject to the Corporate Transparency Act, which imposes limitations on the preservation of anonymity of the members.

The Level of Decentralization Needed

Another consideration on where you should incorporate your DAO is the level of decentralization that you need. Some entities will offer flexible governance structures while others will offer strict ones. For instance, Liechtenstein Foundations are more decentralized as compared to the Wyoming DAO LLC, and the Marshall Islands DAO LLC.

Marshall Islands Foundations

What makes Marshall Islands a preferable jurisdiction?

Marshall Islands has also become a popular territory for the establishment of DAOs. Below are some of the benefits of incorporating a DAO in Marshall Islands:

  • A mixture of applicable legal systems is available: English Common Law, the US Law and local statutes can be used.
  • Setting up is easy: with only three members you can go ahead and set up the DAO. The three members can be individuals or legal persons.
  • In a span of 5 weeks, the DAO will be up and running. You need 3 weeks to set up a company and 2 weeks to have a special license.
  • It is favourable to US based members due to the free association between the two jurisdictions.

The non-profit entity

If you want to set up a DAO in the Marshall Islands, know that most probably you will have to do the non-profit corporation. The corporate laws state the following:

  • The income realized by the DAO is not distributable to members, directors, or officers.
  • The members are only defined in a plain document or in the DAOs smart contract.
  • The purpose of the company and the DAO’s non-profit activity has to be defined.
  • In the Marshall Islands, the DAO have a legal recognition similar to the limited liability organizations. That makes it difficult for the DAO to retain its decentralized status.
  • During the registration process, you must define the name and purpose of your DAO. YOU must state that it is non-profit.
  • The local regulator requires the founding members to pass the KYC process. Anonymity is not much available in Marshall Islands DAO. Any member who holds more than 10% rights has to pass the KYC process.

Cayman Islands Foundations

The Caymans Island has also become a popular jurisdiction for the incorporation of DAOs. It is one of the options amongst the others, which we have discussed.

But why is it popular amongst DAO members? It is because of the following reasons:

  • The country has special rules of dealing with virtual assets under the Virtual Assets Service Providers.
  • With elaborate rules, it becomes possible for the companies to prepare on how to remain within the legal confines without breaking any of the existing rules.
  • The combination of the English and American laws in the legal system has a universal touch, which makes it easy for DAO members to understand the legal requirements.
  • Set up costs are lower than other jurisdictions such as Switzerland, but still higher than the Wyoming LLC.
  • It is speedy to set up a DAO foundation. But on this one even Panama private foundations and Wyoming DAO LLC are speedy.

But does it have limitations? Of course it has as per below:

Panama Private Investment Foundations

The Panama foundations have become some of the most popular legal wrappers in the incorporation of DAOs. One of the advantages of the Panama foundation as a legal wrapper for DAOs is the fact that it provides a secure vehicle for the confidential asset protection. The legal mechanisms provided in the country ensure that the assets cannot be seized even by the government of the country. When you have digital assets, you do not have to worry about their protection. The foundation has you covered.

Due to the protection and anonymity, it has become one of the most popular offshore jurisdictions. It is only second to Hong Kong. It takes only 2 weeks to incorporate a Foundation and there are no special approvals. This means you can start your DAO in literally 2 weeks.

The moment you incorporate your DAO with a Panama foundation, you enjoy the highest level of confidentiality. Unlike other jurisdictions like Wyoming, you do not have to worry about issues such as KYC disclosures.

The advantages of a private foundation

The Panama foundation competes with other jurisdictions in the incorporation of DAOs and it has been proven to be among the best due to its many advantages.

While the concept of crypto assets is relatively new and many jurisdictions are still grappling with lack of an elaborate legal framework, Panama is way ahead. The country will soon have a law regulating the use of Cryptocurrencies, currently it is in its final stages.

As of now, the country doesn’t not recognise crypto neither as a security nor a commodity plus they have also communicated they will not be implementing the VAST rules.

Foundations have proved to be efficient and advantageous legal wrappers for resolving DAO structure issues. The governance protocols in Panama and the favourable tax regime has made it a jurisdiction of choice for DAO founders and their members.

Notably, most jurisdictions do not allow DAOs to operate for profit. Taxes usually apply depending on their incorporation. The situation is different in Panama. The Panama foundation can hold assets abroad without being subjected to taxes.

Besides, there is no scrutiny about the founders and the members and hence DAOs incorporated in Panama will enjoy anonymity. Only the protector has to run the KYC process.

Additionally, they can carry out commercial activities. This is possible by incorporating an IBC and having the foundation to fully own the company. Yet, taxes don’t apply since they are not within the taxpayers’ bracket.

They also have a separate legal personality. Incorporating a DAO through a Panamanian foundation means that the founders and the members are protected from legal liability. Creditors thus cannot purport to go after the virtual assets.

DAOs in Panama have present and future under control

Renowned bodies are consequently setting up their DAO in Panama due to its friendly environment. For instance, SushiDao has set up a DAO in Panama. Such a move and the choice of Panama as the preferred jurisdiction explains the reasons why Panama is good.

Panama is better than Wyoming, which has flawed DAO legislation. It is physically close to the US. It has a free economic zone. And it does not have non-existent income and tax withholding.

If one understands the advantages of the Panama foundation, it is possible to appreciate why it should be the destination of choice. There is no doubt that a Panama foundation does not have beneficial owners. It is also non-commercial.

When the founders incorporate a foundation in Panama as the legal wrapper for the DAO, two entities are created. That makes it possible to separate the GUI meaning there will be no need for the creation of additional entities.

The legal infrastructure in Panama is elaborate. The country is coming up with a legislative framework that will be regulating crypto assets.

In contrast, commentators have been saying that the law regulating Wyoming DAO is flawed. So far, the courts in Wyoming have not dealt on the issues. That means establishing a DAO there would amount to guess work.

However, in Panama there is a consistent legal framework. Consistency in the law is necessary. It is not worth it to subject DAO members to experiments in jurisdictions that have untested and poorly drafted legislation.

Conclusion

In conclusion, there are numerous options where one can incorporate a DAO. Members and founders need a legal wrapper to avoid legal liability. Marshall Islands, Cayman Islands, and Wyoming are some of the options.

While all the jurisdictions have their own advantages and disadvantages, Panama beats them all. From matters of anonymity, tax exemptions, and having elaborate and consistent legal framework, Panama has it all.

The Panamanian foundation is the ideal legal entity to use as a legal wrapper for DAOs. There is no KYC requirement.

Don’t be stuck in confusion. Consult us for more guidance and we shall ensure you enjoy the smooth environment for your DAO in Panama.

foundation incorporation jurisdictions