A New Dawn for Corporations in the Age of Digitalization: DAOs

A New Dawn for Corporations in the Age of Digitalization: DAOs

DAOs are the new and prominent actors of digitalized corporations. With their unique and revolutionary features such as being decentralized and autonomous, they promise outstanding solutions to challenges faced due to the distances between people and unnecessary bureaucratic procedures. The way they function prevents the tyrannical system of classic corporations and partnerships. With the emergence of DAOs, a new, more democratic and decentralized version of corporations and partnerships come to life. Thanks to the wonders of blockchain technology, via the smart contracts DAOs are now able to function with the minimum amount of human intervention. Voting processes and execution of taken decisions are more trustworthy and safer from the potentially corrupt hands more than ever.

Despite all its perks, DAOs currently face a new challenge in the field of Law. The everlasting need of foreseeability and therefore legal norms, raises the question of how to legally categorize and give Decentralized Autonomous Organizations a legal entity. Even though there is no uniform approach on the topic, there are some applicable legislations in different jurisdictions. Namely, in Vermont and Wyoming, new and specific legislations are issued for the DAOs, integrating them mostly to the provisions of LLCs. On the other hand, countries such as Türkiye and Switzerland adopt a different approach. In Türkiye and Switzerland, current legal norms are found to be applicable to the DAOs. For example, according to Turkish Law, it is possible to regulate DAOs as an ordinary partnership.

There are various questions and concerns that shall be addressed by the members of a DAO before deciding to establish a legal entity for a DAO. These questions and concerns range from legal relations a DAO aims to conclude, to the liability of the members of a DAO depending on the amount of debts and obligations a DAO plans to undertake. One of the most crucial thing to keep in mind is the fact that as the debts and obligations a DAO plans to undertake increase, the risk and amount of liability of the members of a DAO increase to the point that the personal properties and financial assets of a member of a DAO may be subjected to a liquidation.

With having a legal entity, DAOs will be able to be a part of legal transactions, own property and assets, sue and be sued, employ and conduct business with legal entities. The liability of the founders and the participants, the rights and obligations of the DAOs will be clearer and more foreseeable.

What is a DAO?

It should be noted that following explanations are made with respect to the general principles and applications of the DAOs. Due to their unique and flexible nature, rights and obligations of the members of the DAO or even how the DAOs work, their voting procedures etc. may dramatically vary from one another.

To be precise, DAO stands for decentralized autonomous organization. DAOs are sort of organizations or entities based on smart contracts written on the blockchain. These smart contracts are made according to DAO’s purpose, functioning, distribution and structure. Main difference between the classic organization and DAOs is the fact that DAOs’ governance relies mostly on its codes and smart contracts instead of typical and sometimes even tyrannical leaderships.

Although a DAO can be multifunctional or it may focus on a specific area of business, with the help of blockchain technology and therefore smart contracts, DAOs are mostly collectively owned organizations that bring people together throughout the world to pursue one common mission. In this common mission, people generally purchase or earn DAO’s tokens and become a member of and in some cases shareholder of the said DAO.

After becoming a part of the DAO’s ecosystem, members of the DAO can participate in decision making procedures in respect to the amount of token they possess. In the event of DAO making profit, members of the DAO may be entitled to have a share of this profit.

Even though it is challenging to strictly define and identify the main features of each unique DAO, it is safe to say that most DAOs are built on three principles: being decentralized, autonomous and organizational.

Some Prominent Features of the DAOs

In this section, we are providing information regarding DAOs’ features. In order to understand the structure of DAOs one must know these features. DAO is decentralized, autonomous and an organization. DAO is decentralized since it is governed with codes and the governance is mostly distributed amongst its members, is autonomous since it can function with the codes without a need of interfering DAOs are said to be autonomous. Last but not least, DAOs are a type of an organization which are gathering people across the world.

First and main feature of the DAOs is being decentralized. As stated above, current DAOs are mostly operated on blockchain. The way blockchain works and the fact that blockchain technology made the possibility of smart contracts a reality, makes DAOs decentralized. After the establishment of a DAO, the founders are not the complete shotcallers in that DAO. Codes and underlying smart contracts take over and DAO is governed in accordance with the codes. Unlike classic corporations and companies, DAOs lack a governing body and its governance is automated thanks to their underlying blockchain technology and smart contracts.

Thanks to the wonders of blockchain and tokenization, DAOs now can function without the necessity to have a governing centralized body. Governance and other aspects of a DAO can be distributed more easily.

Second feature of DAOs is being autonomous. Even though DAOs don’t have a governing body in principle, they have to be able to operate and function somehow. The governing principles and functions of the DAOs are generally imprinted on the smart contracts. After its establishment a DAO can operate and function without needing the approval or initiation of its founders. This autonomous body can exercise its duties and functions independently. Therefore, it becomes an entity which is independent of its founders and automatically functions in accordance with its underlying codes. Since rules of the DAO are embedded in the codes, no administrator is needed, thus it eliminates the barriers of bureaucracy and hierarchy.

With the development of smart contracts, the decisions taken by the DAOs can be executed autonomously with the minimum human intervention. This autonomous feature provides a significant amount of foreseeability by eliminating the risk that comes with human intervention.

DAOs third and perhaps most meaningful feature is being an organization. Even though DAOs are built on codes and smart contracts, they are more than just a few lines of codes or software. DAOs are the entities that people join together to fulfill a purpose. Its ability to unite people across the globe in something that people want to work on together is simply fascinating. That’s why in our opinion DAOs are not just an organization that is built on smart contracts but rather an exceptional and innovative international organization that extinguishes the distance between people.

The emergence of DAOs is perhaps the last missing piece of a true globalization. With its innovative and revolutionary nature, people all across the globe can truly come together to pursue one common goal under an organization.

How to establish a DAO and how does it work?

DAOs mostly function via smart contracts. These codes that lay out the working and governance principles of a DAO are essential in its formation. Codes that are integrated into the smart contracts are generally open-source and recorded on blockchain. Therefore, these sets of rules and principles that are set forth by the DAO can be viewed by the members of the DAO.

The fact that DAOs mainly function according to their underlying smart contract and therefore codes doesn’t mean that they are such organizations that lack people. On the contrary, the very codes and smart contracts that form the DAO itself are programmed by people. In these smart contracts founders lay out the fundamental principles and rules of the DAO, the voting procedures and field of activity etc. Unlike hierarchical structures, each member of the DAO can control the operating protocol at some level, and it is in the interest of individuals that all rules benefit the entire DAO. These rules, which will form the protocol of the DAO are recorded in the blockchain. This protocol also includes DAO’s operation and finance model.

After its establishment, generally DAOs funding process starts. In this period, people all across the globe who wish to participate in the DAO, purchase the tokens of the said DAO. Sometimes these tokens are called governance tokens because they enable its holders to participate in voting procedures of the DAO and therefore have a say in its governance. Also, it is quite common for these tokens to entitle their holders to have a share of profit generated by the DAO.

To sum it all up, in DAOs, the rules agreed by the community are applied via smart contracts, voting is done and the codes containing all these rules and operations are made publicly available. Without intermediaries and unnecessary hierarchy and bureaucracy, a group of people possibly with different backgrounds gathers around a decentralized autonomous organization and works on various projects, some of them with financial goals or some with other purposes. If the DAO generates an income and makes a profit, then this profit is shared in accordance with their DAO Token holdings amongst the members of the DAO without avoidable intermediaries and bureaucracy.

After forming its smart contracts and therefore the governing rules and principles of a DAO, tokens of the said DAO are generally offered. With the token offerings people become a member of the DAO which mainly gives its holder the right to vote and to be entitled to profit generated by the DAO. The wonders of blockchain technology and smart contracts also eliminate the unwanted intervention of intermediaries and unnecessary bureaucracy.

Advantages of DAOs

There are many advantages of DAOs. A DAO can function worldwide, you just need to be online. DAOs’ rules are predefined and public so you will know what you are getting into. Plus, you can see any action or decision that is taken within the DAO, it is always recorded mostly in blockchain. You can gain much by contributing small amounts. Even if you lack the financial resources, you can always put your trust and finances to a DAO, as long as it fits you. In DAOs, you have a saying! Your opinion matters and will affect the decisions of the DAO. You are a customer of a DAO and at the same time, you are an owner. So, you will know what benefits you and your organization better.

DAOs offer to solve and overcome many problems regarding classic corporations and the financial system. Ranging from enabling a system without classic intermediaries to democratic decision making, it brings forth an innovative approach to organizations.

First of all, due to its digital and technological nature, DAOs generally cut across the limitations set by geographical difficulties. People all across the world who don’t know and trust each other may come together under an organization that serves a common goal. In that sense, individuals become a member of a DAO and work with one another or invest in a project.

Even though getting rid of the limitations that are set forth by the borders is sometimes perceived favorable, it is not always the case. In the classical system, it is hard for individuals to invest in overseas projects or companies. It is quite scary and challenging for a person to defend its right in a foreign jurisdiction and law system. However, with the underlying technology of the DAOs, individuals who decide to become a part of a DAO know the procedures and consequences of each action. Another advantage of DAO is that rules are predefined, transparent, verifiable and distributed. Since the rules are always clearly verifiable, the member will join the DAO by accepting the rules of the DAO. More importantly, these actions and consequences are generally executed automatically and autonomously by the DAO itself. That’s how the DAOs offer to solve trust problems of its members.

Many people are concerned when it comes to putting your finances and hours of your time to a foreign investment of any kind. With the foreign projects or organizations, comes the element of surprise, a different law system and a jurisdiction! Since the governing principles and rules of a DAO are predefined and mostly transparent, members of a DAO generally don’t have to fear uncertainty.

One other feature that makes DAOs attractive is its ability to create a more trustworthy environment when it comes to company governance. Unfortunately, there are more than countable cases where corrupt managers or founders of a company fraud its investors or embezzle the assets of its company. Due to its transparent nature, codes of the smart contract are generally open for public display. Everything is recorded in its blockchain. Moreover, a DAO’s rules and transactions are always recorded on the blockchain, ensuring full transparency and accountability of every financial decision and action. While central organizations may keep opaque records, DAOs’ records are always public. With its technological features, DAOs offer quite reliable protection regarding corrupt managers.

Embezzlement, fraud and corrupt managers and founders are an ever-lasting problem when it comes to trusting classic corporations and organizations. Thanks to the underlying technology of DAOs, namely blockchain, the transactions and accounting of DAOs generally recorded in its blockchain which enable the members of a DAO to audit and follow the transactions of the DAO.

Sad but true, it is always cheaper to think of something rather than doing it. In business life, and in almost every aspect of life, it is the same. People with ideas generally lack the necessary capital to realize their project. With DAOs even the individuals with relatively small capitals are incentivized to invest in these projects. It is possible and therefore fascinating to raise a great amount of capital out of small put many capitals within a minute.

Decentralized decision making has two major advantages. For starters, it can help to alleviate agency issues. Second, it allows for greater engagement with an organization’s stakeholders, such as employees and customers, which can strengthen the organization’s sense of identity and belonging while also improving information flow.

When we hire a financial advisor to manage our investments, we want the advisor to allocate funds in a way that maximizes our wealth; however, the advisor may have an incentive to invest in high-fee products that earn a lower return. Similarly, agency issues are prevalent in public companies, ranging from labor negotiations to CEO compensation, merger decisions, and capital investments. These types of issues could be greatly reduced when all owners are directly involved in decision making, as in a DAO.

Shareholders of a company are frequently users of its services and products. They have firsthand knowledge of the quality, strengths, and weaknesses of the company’s offerings and can provide valuable feedback. This is usually invaluable to the organization’s success. Additionally, when customers are also owners, they develop a sense of belonging and identity, which promotes loyalty, coordination, and incentive alignment. This is a feature shared by credit unions, cooperatives, and DAOs. When organizational structures are centralized, users are not directly in control of the company and may not feel as empowered to contribute to information dissemination and optimal governance. While most organizations in the world are managed and controlled by central parties, DAOs entrust the management of the organization to members who have invested in them. In theory and in practice, every investor has the opportunity to assist in the management of the DAO.

If you think about classic corporations, you can see that control of the company is generally left to the central parties. On the other hand, DAOs enable and moreover incentivize their members to be a part of the governance of the DAO.

Disadvantages of DAOs

It is best to make a pros and cons list for DAOs. Anyone can become a member. But this means that people who lack knowledge or information of the DAO will become a member too. If one doesn’t have a clue of the function or the purpose of a DAO, they may take actions and these actions can have outcomes that are not in favor of the DAO. For a decision to be passed, it shall be voted by the members in the DAO. So, decision making will, probably, take time to settle. Digital world comes with downsides, such as cyber-attacks. If a hacker gains access to the system, they can steal funds or your data.

In DAOs, there are some disadvantages. For instance, lack of confidentiality, potentially higher organizational expenses, expertise problems and lack of fast decision making.

Decision-making is not a free process. It takes time and effort to learn about all of the options and weigh the benefits and drawbacks of each. Since it is inefficient, this is why businesses centralize decision-making by hiring managers who have extensive experience. Decentralized owners or group members are less likely to be informed and understand the consequences of their decisions than a CEO and expert team.

Many corporate decisions are meant to be kept private and unknown to current or prospective competitors or even to its shareholders. This advantage allows businesses to stay ahead of the competition by keeping their data and strategic plans hidden. In contrast, a decentralized decision-making process allows information to be widely accessible, making it more difficult to keep information confidential. To ensure confidentiality to some extent, DAOs may prefer to use private blockchains that prevent unauthorized access. Usage of private blockchain may provide some confidentiality against outsiders but as a rule, the information regarding the decisions that are taken and executed by a DAO through smart contracts and blockchain will still be widely accessible to its members. This situation may be undesirable for a DAO, because sometimes there is such information which is meant to be kept hidden even from the members of a DAO.

Organizations sometimes have to make quick decisions. Decentralized organizations must put proposals to a vote and give all governance token holders time to understand and vote on potential courses of action. In contrast, centralized organizations are often better able to make quick decisions because only a few people are required to be involved in the process.

Contrary to decentralized organizations, centralized and classical organizations sometimes have the opportunity to make decisions faster. Due to their centralized nature, classic organizations can react quicker when needed.

Almost every technological innovation comes with a downside. Inevitably, as the digitalization continues more it is possible to face new cybersecurity challenges. DAOs may be more susceptible to fraud and hacking than traditional organizations. Since their very existence and function is based upon smart contracts and codes, they are more vulnerable to cyber-attacks. Because DAOs are decentralized, no central authority is responsible for its security. If hackers can gain access to the organization’s computer systems, they can steal funds or user data.

As it is stated thoroughly throughout this paper, DAOs are built upon new technologies and almost fully digitalized. Despite the strong and reliable safety blockchain technology has to offer, DAOs are more vulnerable to cybersecurity problems.

DAOs may be less adaptable to shifting conditions than regular organizations. A DAO lacks a centralized authority to adapt swiftly to changing conditions since it is decentralized. This might make it difficult for the business to adapt to new problems and opportunities.

Finally, the lack of a defined regulatory structure is the primary worry with DAOs. The majority of countries throughout the globe have not properly stated their legal position on DAOs. This may impede organizations’ quick development. Their worldwide character and international membership make this scenario much more difficult. Uniform or almost identical legislation throughout the world would hasten the emergence of DAOs.

Why Do People Prefer DAOs?

People need, want and long for many things. Despite its search for independence, a huge part of being human is being dependent on each other. If not for the cooperation and the ability of humankind to work together, many wonderful features of our civilization would have not been established. Throughout the history of humankind, peoples that manage to form an effective, practical and relatively fair organization thrive and prosper.

Many things and concepts that were revolutionary and innovative for their times eventually bit the dust and became old-fashioned. Our current understanding of corporations and organizations struggle to address the needs of innovative projects and people and here is why:

As the corruption and bureaucratic formalities increase, the efficiency of the organization decreases. Legal and economic structure of the classic organization types started to be questioned long ago. Current legal structures for organizations such as partnerships and companies are wholly regulated. Rights and obligations of said organizations are strictly set forth by the governments. From managing the treasury to voting rules and procedures, almost all of the features and functions of an organization are decided in people’s stead. Applicable classic law lacks the appropriate solutions for new technologies. Almost everyone is complaining about the fact that judicial processes take so long. However, so far nothing seems to change. Sometimes judicial processes are carried so inefficiently to the point that solving the disputes and disagreements through judicial processes is even more expensive than the dispute itself.

Now, in the age of technology and digitalization, a new dawn for organization is seen on the horizon. Artificial boundaries set by the states are no longer withholding people from coming together.

Thanks to the developing technologies, people from different citizenships and geographies now have the opportunity to pursue a common goal.

To prosper and to have sustainable development, societies have to find a fair, organized and fair way. Current types of organizations lack the necessary features in the age of digitalization. In addition to their strictly regulated nature, the law itself struggles to address the question arising from new technologies. With the foreseeability, safety, and international nature they have to offer, DAOs emerge as a new type of organization.

Legal Structures for DAOs

If you want your DAO to be official, you should check out below for sure. It’s known that because DAOs are not governed, founders or members may be held accountable for their actions if something goes wrong. Since there are legal structures that provide a limited liability, you may want to consider legally establishing your DAO. This also applies to being able to enter into contracts with other companies, or even opening a bank account for a DAO if needed. We tried to sum up the options we have in the governed world that can be considered for a DAO.

DAOs as Partnerships

Because of its structure, a DAO can be seen as a partnership in many jurisdictions. If not legally acknowledged in another legal structure, we can say that a DAO is basically a partnership, as long as you formed that organization for profit.

To be more specific, if present worldwide legal frameworks apply to for-profit DAOs, its members would most certainly be called partners.

In general terms, partnership is a relationship established between persons who agree to share the profits and loss of a business which these persons come together to carry it out. Therefore, persons who wilfully enter into such a relationship are called Partners. Such a categorization may not appear noteworthy for DAOs created just for personal gain; yet, it poses a number of difficulties. To be more specific, if present worldwide legal frameworks mentioned below would apply to for-profit DAOs, its members would most certainly be eligible to be called partners.

Firstly, if a person or entity acquired or was granted tokens in the DAO, for instance, through an airdrop or as payment for supplying goods or services to the DAO, that person or entity may become a partner. Similarly, if a person sold all of their DAO tokens, they would no longer be a partner, and a new partnership would continue between the remaining token holders. Token holders, and therefore partners, might enter and depart on a daily basis, rendering partnership legislation impractical.

In the possibility of a DAO having more than one type of token, every token holder may not be qualified to be considered as a partner. In this context, the type and nature of the token is crucial. Tokens that enable its holders to have a say in the decision making process of the DAO or the tokens that entitle its holders to have a share of the profits and losses of the DAO would be eligible to qualify its holders as a member. On the other hand, tokens that do not give rights to its holders that partners generally have would not be eligible to qualify its holders as partners.

Additionally partnerships are often formed by persons who know and trust one another, and the partners have fiduciary obligations to one another and to the organization. Since partners are considered agents of each other and the organization, they have the power to bind their other partners and the organization. Since partnerships do not have separate legal bodies, they cannot own assets or conclude contracts, and other organizations may be hesitant to conclude contracts with the DAO due to its lack of legal authority. Such legal affairs shall be carried out via the partners of the partnership. More importantly, partners are jointly and severally accountable for the DAO’s debts, obligations, and errors.

DAOs such as charities cannot be deemed as partnerships since they lack profit motive. People may be unaware that they have created a partnership when they participate in activities with others with the purpose of making a profit but do not formalize their legal structure. Therefore, regardless of whether DAO members consent to such enforcement, laws will apply to them. Since some DAO members may use anonymous identities, they make it more difficult to enforce the law against them. In actuality, DAO members who are identifiable carry significant risks since they might be sued for the DAO’s debts or become targets of regulatory action. Some DAOs that claim to be non-profit may be deemed as for-profit and hence a partnership. For example, if the DAO contains transferable tokens and persons or businesses are ready to pay for them, the DAO may be considered and deemed as a for-profit DAO rather than a non-profit one. This is due to the fact that not-for-profit entities cannot issue shares, and most DAO tokens will function similarly to a share in a business if they represent a share of the DAO’s equity.

It is recommended that DAOs be recognized as fitting within current legal frameworks, such as LLCs in the United States, and that such frameworks be modified as needed to accommodate the decentralized structure of decision-making within DAOs. For instance, it could be better for DAO developers to register as a LLC in a US state such as Wyoming, since the LLC would be recognized in New Zealand and Australia. Since there is no single type of DAO, developing sui generis legal organizational structures for multiple types of DAO at this juncture is not practical.

If no other applicable legislation is present, then, organizations that aim to profit are generally considered as partnerships. Tokens that grant their holders the power to govern the DAO to some extent, make their holders able to be considered as partners. With being considered as a partner, comes a great amount of power and responsibility. Each partner has the power to bind other partners and partnership. Each partner is responsible for and entitled to debts and obligations of the partnership, as well as its profits and rights. That much liability may result in the liquidation of the personal assets of a partner. Finally, the way that partners define themselves in such relations, doesn’t affect the eligibility of a DAO to be considered as a partnership. Be Careful!

DAO as Unincorporated Associations

If you are seeking a non-profit organization, becoming an unincorporated association may suit you in this journey. Similar to partnerships, if certain conditions are met, members of an unincorporated association may be held liable for the debts and obligations of the unincorporated association. Furthermore, due to the fact that unincorporated associations lack legal entities, legal affairs may be challenging to be carried out via unincorporated associations.

One can say that unincorporated societies are similar to partnerships in Australia, New Zealand and the United Kingdom. An unincorporated association is generally an organization that consists of at least two people of whom there is an agreement amongst. The key point of unincorporated association is the fact that they have to be established to pursue a common goal or fulfill a duty other than making a profit. These unincorporated associations lack legal personality.

As with partnerships, the absence of a legal identity and consequently, legal status poses issues. Because they are unincorporated, there is no legal entity against which to litigate, and jurisdictional concerns may emerge. Furthermore, because they lack legal personality, unincorporated associations are unable to enter into contracts. Because of their lack of legal standing, other persons and corporations may be unwilling or even prohibited from engaging with them.

Unincorporated associations cannot hold property. However, similar to partnerships, there is no practical requirement for a DAO to utilize others to store property such as tokens due to the DAO’s capacity to manage assets housed on a blockchain. However, as with partnerships, some property, such as land, may be owned solely by legal bodies. As a result, a non-for-profit DAO cannot completely eliminate the risk of the DAO’s assets being misappropriated by those who are supposed to keep them in trust for the DAO.

Further limitation of unincorporated association legislation for DAOs is that members of an unincorporated society may be held accountable for the association’s debts in certain circumstances. First, if the rules of the association state that they are liable, such as if they agree to personally indemnify the committee or the trustees for actions taken while transacting business on behalf of the association ; and second, members can be liable if they voted in favor of the action that incurred liability.

Limited Partnerships and Limited Liability Partnerships

Limited partnerships and limited liability partnerships are types of organizations that are recognized by most of the governments. Contrary to classic partnerships, at least one of the partners of a limited partnership has limited liability. In limited liability partnerships, liability of all partners is limited.

Many governments recognize limited partnerships (LPs) and limited liability partnerships (LLPs). Limited partnerships are again a type of a partnership however, in limited partnerships liability of at least one partner is limited. While in general partnerships every partner is personally liable of the debts and obligations of the partnership, in limited partnership there is at least one general partner that has unlimited liability. Limited Liability Partnerships on the other hand are also a type of partnership in which all of its partners have limited liability in contrast to Limited Partnerships. In comparison with Limited Partnerships, as a rule, every partner of the Limited Liability Partnerships has the right and possibility to be involved in the decision making procedure of the LLP while in Limited Partnerships generally only the general partner has the right to make decisions whereas the limited partner only makes a financial contribution.

Because they are meant to address the shortcomings of general partnerships, such as the absence of a legal body and the lack of restricted responsibility for partners, LPs and LLPs may be appropriate for for-profit DAOs.

Limited partners and general partners are the two sorts of LP partners. General partners have unlimited responsibility, but limited partners do not. Limited partners cannot participate in management in exchange for limited responsibility. A management decision would involve participating in a decision to approve or veto LP investments if the value of the investment is less than half the value of the limited partnership’s assets prior to the investment. LPs, on the other hand, have limited utility for DAOs and are not an acceptable legal structure for the majority of DAOs. For instance, they are not suitable for not-for-profit DAOs.

LLPs are akin to LPs, in that they normally have just one type of partner, although all partners can participate in management if they agree. The capacity of all LLP partners, and hence DAO members, to participate in management appears to make the LLP structure more appealing for for-profit DAOs than LPs.

Since LLPs and LPs provide a limitation on the liability of its partners, they appear as an eligible candidate to address the shortcomings of partnerships. Additionally, the fact that they are a separate legal entity enables them to conduct legal affairs, such as owning property and signing contracts.

Foundations

Foundations are non-profit organizations regulated differently in various jurisdictions, notably within the US states where they are a prevalent legal structure. DAOs prefer foundations over limited partnerships or limited liability companies.

In addition to foundations, Switzerland recognizes Swiss Associations as an option to foundations. A Swiss legal company has developed a framework for decentralized autonomous associations (DAAs) in order to better match the Swiss Association with DAOs by eliminating centralization points. Instead of the Association’s board of directors, which has the authority to administer the Association’s business, every member of the DAA community has the power to suggest new initiatives and vote on whether they should be supported. Since the voting is done on-chain, it cannot be overturned. If a proposal is approved, the outcome of the vote is carried out automatically, without the need for human intervention.

While the power of members to propose proposals and vote on them, as well as employ on-chain voting, appears to satisfy most DAOs and be an appealing legal framework for DAOs, DAAs have strict limitations for DAOs. The key limits are that the association is restricted to one vote per member and that membership is difficult to obtain.

Another restriction would be that DAO tokens would not be freely transferable. A person must have Swiss residence or have visited Switzerland within the preceding three months to become a member of a DAA. Furthermore, the DAA requires one DAA delegate, a real person, to undertake activities mandated by Swiss legislation.

Business Trusts

Some states in the United States consider business trusts to be independent legal entities, allowing them to sue and to be sued. In contrast, business trusts, known as trade trusts in New Zealand and other jurisdictions, cannot be registered and are not legal organizations. The drawback of business trusts or trading trusts is that the individuals or businesses owning trustee tokens act as a centralized element.

A business trust’s constraint is that people holding trustee tokens can transfer the DAO’s property, which on the surface would violate the objective of a DAO because no single person should be able to transfer or otherwise dispose of the DAO’s property. However, because there would be various trustee tokens, there would be multiple trustees rather than a single or a few trustees. Nonetheless, token holders are exposed to the trustee’s activities. If a DAO used such a structure, it would also practice delegated democracy since token holders would delegate decision-making to the trustees. This may work for certain DAOs, but not all.

Furthermore, trustee token holders may face personal responsibility, and while they may have a right of indemnification against the DAO’s assets, the DAO’s assets may be inadequate.

Some jurisdictions treat business trust as a legal entity and some don’t. If business trust structure is to be applied to DAOs, then, various problems arise. First of all, holders of the trustee tokens may exercise some right over the DAO’s assets. Additionally, trustee token holders can be held personally responsible for the DAO.

Limited Liability Corporations, LLCs

Since some DAOs have been registered as LLCs in the United States, this section concentrates on them. LLCs are controlled at the state level rather than the federal level, so law differs by state in the United States. As a result, there is no consistent handling of LLCs in the United States.

LLCs are a hybrid of a partnership and a corporation that sprang from partnership law and have become a popular legal form in the United States. While LLCs are not incorporated corporations, they are registered entities that provide their members with limited liability. They are not taxed individually, and the terms of each DAO may be customized, much like a partnership agreement. Thus, unless the applicable LLC Act or the LLC’s operating agreement allows for such a power, members of an LLC will be unable to remove a member.

Due to its constraints, the LLC is not a great vehicle for DAOs. First, while DAO members are not individually accountable for the LLC’s obligations, they may still be liable for their own torts, such as if a member designed a smart contract poorly. Second, even if a shareholders’ agreement provides for the elimination of a board of directors, at least one shareholder must be a natural person, meaning an individual human being.

Third, registering a DAO as an LLC is not final since the registration can be withdrawn. For example, in Delaware, the Attorney General can commence procedures in a court to cancel an LLC’s certificate for misuse or abuse of its limited liability company powers, existence or advantages. Fourth, unless the founders of a DAO engage the services of an organization that provides LLCas-a-service, the cost of developing an LLC operating agreement can be considerable since DAOs would be needed to draft their own LLC operating agreement. Finally, while the LLC may work for certain for-profit DAOs, it may not function as well for non-profit DAOs. Indeed, as we have seen, other DAOs have adopted other structures, such as foundations.

Despite their restrictions, LLCs are the most appropriate legal structure for for-profit DAOs of all the legal structures examined thus far.

Since LLCs are regulated differently by each state, there is no uniform set of rules regarding DAOs. However, regulations set forth by different states don’t significantly differ from one to another. Also, LLCs provide a substantial amount of limitation on the liability of DAOs’ members. On the other hand, they are subject to a wholly regulated structure which limits the flexibility of DAOs. Additionally, due to their profiting nature, LLCs are not an applicable legal structure for non-profit DAOs. Despite its downsides, LLCs appear as the most appropriate legal structure for for-profit DAOs.

Unincorporated Non-profit Associations (relevant to United States only)

If a state has adopted the Uniform Unincorporated Nonprofit Association Act, an unincorporated nonprofit association can own property, enter into contracts, sue and be sued. Accordingly, Wisconsin, Colorado, Delaware, the District of Columbia, Hawaii, Idaho, Texas, West Virginia have adopted the Uniform Unincorporated Nonprofit Association Act. For the states aforementioned, who adopted the Uniform Unincorporated Nonprofit Association Act, the unincorporated non-profit is treated as a legal entity.

An unincorporated non-profit is a separate legal organization under the Revised Uniform Unincorporated Nonprofit Association Act, which has been approved by various states. The ability to register unincorporated non-profit associations in US states avoids the issues that unincorporated societies face in Australia, New Zealand, and the United Kingdom, such as the inability to hold property, enter into contracts, sue and be sued, and the potential liability of members for the society’s or association’s debts and wrongs. As that being said, the formation of the DAO shall be non-profit in order to fall in this category.

Worldwide regulations regarding DAOs

Türkiye

In this section, applicable legislation in Turkish Law to the DAOs (if any) will be examined. Before getting started, it is necessary to underline that legal opinions set forth in this section are mostly based on the common features of the DAOs. For each specific DAO a new and specialized legal opinion shall be constructed.

In Turkish Corporate Law, companies are set forth in accordance with numerus clausus principle. There are two main branches of corporate law, namely equity/stock companies and partnership companies. Companies such as LLCs, incorporated companies and partnerships that fall into the scope of either equity companies or partnership companies are strictly regulated. Their procedure of establishment, governance and rights and obligations of its partners or shareholders are rigidly regulated. In order for an organization to be accepted as one of these companies, there shall be clear legislation that makes it possible. Unfortunately, since there is no regulation regarding the legal characteristics of DAOs, it is not possible to evaluate DAOs within these types of companies. However, this doesn’t mean that there is no applicable regulation in Turkish Law to DAOs.

In Turkish Corporate Law, companies are strictly regulated. Only the types of organizations that are foreseen and regulated under Turkish Law can be established in Türkiye. Their establishment, governance, rights and obligation of its partners and shareholders are decided by the law. Due to the lack of legislation, DAOs are not seen as a company under Turkish Law. Beware! This does not mean that there are no applicable regulations to DAOs.

In Turkish Law there is a type of organization called ordinary partnership which is also known as unlimited company or unincorporated association. According to the Turkish Code of Obligations article 620/2: If a partnership does not have the distinctive features of partnerships regulated by law, it is considered as an ordinary partnership subject to the provisions of this section.” Since the DAOs are not legally foreseen by the law, the only applicable piece of legislation regarding them in the manner of corporate law is the provisions that are set forth for the ordinary partnerships.

The Turkish law system accepts partnerships that do not fall into the scope of regulated ones as an ordinary partnership. Since DAOs can’t be regarded as regulated partnerships or corporations, rules and principles regarding ordinary partnerships will be applied to DAOs.

Formation of Ordinary Partnership and Evaluation of DAOs in This Manner.

Ordinary partnerships are based on an agreement which is to be concluded amongst its partners. There is no specific requirement for a partnership contract that shall govern the ordinary partnership. These ordinary partnership agreements may be both written or in any other format. So, even the actions that can be regarded as an acceptance of ordinary partnership may be enough for an organization to be possibly considered as ordinary partnership. Since there is no specific requirement for the formation of an ordinary partnership, DAOs and their way of bringing people together is quite eligible to be considered as partnership formation.

For ordinary partnerships, there is no written form requirement. Even the actions of people can be regarded as the formation of an ordinary partnership. Lack of written form requirement increases the possibility of DAOs being accepted as ordinary partnerships.

As a rule, these ordinary partnerships are formed with at least two people. Also, there is no limitation regarding the number of partners. In theory and sometimes in application, an ordinary partnership may have hundreds or even thousands of partners. As explained above, DAOs are the organizations where people across the whole world get together to accomplish something for some reason. In this way, DAOs again fall into the category of ordinary partnerships.

In terms of capital, partners of an ordinary partnership are obligated to provide a capital for the partnership to pursue its founding reason. Partners of the ordinary partnership may bring any thing that is of economic value. Even though ordinary partnerships do not have a legal personality, the capital generated from the input of partners are allocated for the activities of the ordinary partnership to accomplish its purpose. In exchange for providing the capital, the title of partner is given to providers. In the case of DAOs, DAOs’ governance tokens or assets that give out partnership rights and obligations to the holders are mostly purchased via the cryptocurrencies. Therefore, the transaction concluded to send cryptocurrencies to an address via smart contracts in exchange of DAO governance token may be eligible to be considered as an act of providing a capital.

In ordinary partnerships, there is no limitation on the number of partners possible. Since DAOs tend to have many members, ordinary partnerships are flexible and applicable in this manner. Also, partners of ordinary partnerships are obligated to provide a capital which can be anything that has an economic value. In the context of DAOs, tokens or assets that give out partnership rights have the strong possibility to result in the acceptance of holders as a partner.

In conclusion, according to Turkish Law, it is possible to consider the DAOs as ordinary partnerships. Since DAOs meet the criteria of at least two people gathering up for a common purpose via providing a capital or something that has economic value, the rules regarding the ordinary partnerships are applicable.

Applicable Specific Regulations Regarding Ordinary Partnerships for DAO

According to article 622 of the Turkish Code of Obligations, partners are obligated to share the earnings of the ordinary partnership between each other. Since most of the DAOs are established to make a profit or generate an income, the question of sharing the profit is essential. If the DAO makes profit, then, this profit or earnings shall be shared amongst the DAO governance token holders in accordance with the amount of token they hold.

According to article 624 and 625 of Turkish Code of Obligations, decisions that have to be taken to govern the ordinary partnership should be taken by the partners. The quorum needed to make these decisions may vary depending on the agreement between the partners of the ordinary partnership. Also, the governance of the ordinary partnership may be left to a specific group of people. In the perspective of DAOs, decisions are generally made according to the choices of the partners mostly in a democratic manner. So, provisions that are foreseen for the ordinary partnerships provide the necessary flexibility for the decision-making procedures of the DAOs.

Wyoming

In July 2021, Wyoming passed a law allowing the establishment of DAOs for the first time in the world and became the first state to recognize DAOs as limited liability corporations (LLCs) within the United States. Thus, in Wyoming, DAOs gained legal status as limited liability companies and were recognized by state authorities. In this context, although some additions are made to the law regulating limited companies in Wyoming, the rules applied to limited companies in the law can also be applied to DAOs unless otherwise stated. Such as articles of Association, members’ rights, duties, relationships, voting rights, DAO activities and how they are carried out, ways to change articles or articles of association, distributions to members, transferability of membership interests, member contributions, liquidation and distributions to members after termination, changing, updating smart contracts or regulatory procedures. Most of the information needed to run the DAO will be available in the Whitepaper of the organization that created the DAO and announcing its benefits to potential members.

Wyoming, being the first state in the U.S. to recognize DAOs, allows DAOs to be established as a LLC. Therefore, relevant rules and principles regarding LLCs will be applicable to DAOs that are established as LLC.

According to the regulation, DAOs shall be recognized as a company, DAOs can own real-world assets, the rights of stakeholders and the functioning of the DAO shall be legally protected by contracts, DAOs shall carry out legal transactions between each other, employ workers, and have an account in a bank. DAOs shall be able to open a document, sign a document, that is, operate like a legal person.

DAOs that are established as LLC have a legal personality and therefore can own assets and be entitled to have legal affairs with one another on their own.

Apart from that, according to Wyo. Stat Ann article 17–31–109, DAOs can be “algorithmically managed” by the underlying smart contract without human intervention. The DAO is not required to disclose the operation of the smart contract or contracts used to run the DAO’s business, but the law requires that the underlying smart contracts be “amended or otherwise editable”. This requirement can pose a challenge for many DAOs because one of the main advantages of using blockchain and smart contracts is that the record is immutable. Given this situation, it is not possible to change contracts easily without a completely new contract to replace the previous version.

According to the Wyoming laws, DAOs’ don’t have to disclose their smart contract. However, the same law requires DAOs to have an editable smart contract, which to some extent is contrary to the philosophy of blockchain based smart contracts.

Another issue mentioned in the law is that the members should be aware that the law specifically hinders their right to examine the records. Since transactions made under the DAO are transparent on the blockchain, additional document transparency will not be required.

Vermont

The Vermont Limited Company Act provides that DAOs can be registered as Blockchain Based LLCs (BBLLC). A BBLLC is a DAO that has been incorporated in Vermont as a Limited Liability Company (LLC). This act allows a DAO to enter into legally binding contracts and protects its owners, managers, and blockchain participants from unwarranted liability. As a result, general LLC provisions apply to BBLLCs. The key development in this act is that company governance can be provided entirely or in part through blockchain technology. The act also recognizes the use of blockchain-based smart contracts for voting on BBLLC operations and activities.

Tennessee

Tennessee followed Wyoming’s lead and enacted its own DAO law. The entity type in Tennessee’s legislation, on the other hand, is referred to as a “decentralized organization,” or “DO.” DO LLCs are subject to Tennessee’s ordinary LLC legislation as well. In many ways, Tennessee law is extremely similar to Wyoming law.

Marshall Islands

In February 2022, the Marshall Islands officially recognized DAOs. As a result of amendments to the non-Profit Entities Act, which came into force in 2021, DAOs can be established as non-profit limited companies and memberships can be registered on the blockchain. The first legal DAO on the island was registered as Admiralty LLC of Shipyard Software, a DeFi-focused infrastructure developer.

Australia

Currently, DAOs do not have legal personality in Australia. At Australian Blockchain Week on March 21, 2022, Senator Andrew Bragg spoke of the legislator’s intention to draft regulation regarding DAOs. This regulation is expected to exclude algorithmic DAOs and is considered to be applied retroactively after a transition period. For now, a DAO can only benefit the relevant regulations by becoming a legal entity that would be recognized in Australia.

Switzerland

There is no specific legislation for DAOs in Switzerland at this time. Because there is no specific legislation adjusted to these new types of entities, we must rely on the existing laws to understand them in the legal order. DAOs as organizations should be acknowledged and qualified under private international law in order for their legal effects to be defined in Switzerland. The Swiss Private International Law Act (PILA) thus governs the recognition of foreign DAOs in Switzerland. The concern of a DAO being recognized as a validly formed company is the foundation of its presence as a subject of obligations and rights without which a DAO cannot perform legal acts or institute legal proceedings. According to Maltese and Vermont legislation, regulated DAOs are adequately structured under Art. 150 PILA to qualify as companies under private international law. As a result, if a regulated DAO is validly formed under the law under which it is organized, it can be recognized in the Swiss law order under Art. 154 par. 1 PILA.

SEC and Regulatory Uncertainty

The SEC considered how the DAO’s tokens should be treated under securities laws. The SEC defines a “security” as “an investment contract,” which is a monetary investment in a common enterprise with a reasonable expectation of profit from the efforts of others. Although buyers of The DAO tokens could vote on proposals presented to them, they were relying on the people who created the structure and the “directors” who chose which proposals to vote on. The SEC concluded that the voting rights granted to these ownership interests were similar to those of a corporate shareholder due to the wide dispersion of ownership of the DAO tokens and the anonymity of their owners. As a result, interests such as the DAO tokens are typically required to be registered under securities laws.

Should a DAO Seek a Legal Entity?

In terms of liability, becoming a legal entity may not be favorable for some members of a DAO. It depends on the choice of the legal structure and the favorable options of such legal structure shall be considered at the meantime. Please see our questions below and make an assessment whether you would prefer to become a legal entity. Also, there is a table below which shows the possible phases of a DAO. You may compare your DAO’s situation and decide whether you should establish a legal entity or not.

The question itself is somehow tricky. To answer this question, one shall examine why a DAO would want to have a legal entity. Also, how a DAO is able to seek a legal entity is one of the most crucial questions that members of a DAO shall ask before taking an action. With different types of corporations and partnerships come various liability regimes, rights and obligations.

For example, in case of having a legal entity due to be considered as ordinary partnership, partners of the ordinary partnership are personally and fully liable for the debts of the ordinary partnership. In a different example, if the DAO is regarded as an incorporated company, then, the shareholders of the DAO will be liable only for the amount of capital shares that he/she has committed. So, in terms of liability, creating a legal entity may not be always favorable for the members of a DAO.

One other thing that also has to be taken into account before taking an action is whether a DAO wishes to conduct legal matters that require a legal entity or not. For example, if a DAO wants to sue someone, then, as a rule, it needs to have a legal entity. Moreover, if a DAO wants to own property or employ an employee then, again as a rule, a legal entity is a necessity.

To summarize this section, here are some fundamental questions that members of a DAO should ask themselves:

• As a DAO, do you wish to enter into legal relations with other natural persons or legal entities?
• Do you want your DAO or yourselves as the side of possible legal relations?
• As a member of a DAO do you want to create a separate legal entity for your DAO that enables its members to have limited liability or do you want to risk the possibility of being considered as partnerships and therefore personally liable of the debts and obligations of the DAO?
• Do you want your DAO to own property, to have a bank account?
• Do you want your DAO to be eligible to pursue its rights before courts and other relevant legal and administrative authorities?
• Depending on the actions your DAO takes and debts and obligations that it undertakes, is the risk of being personally liable for the debts and obligations of your DAO affordable and foreseeable?
• Are you ready to afford, to undertake and to provide the legal and administrative infrastructure to conclude the bureaucratic, monetary and legal procedures of establishing a legal entity? Considering your actions, revenues and profits, is establishing a legal entity for your DAO affordable and worth it?
• In what jurisdiction do you wish to establish a legal entity for your DAO? Are you qualified to establish one according to that jurisdiction? Do you have the legal infrastructure and resources needed for such an action?
• To what extent the legal obligations, procedures and liabilities comply with the way your DAO wishes to operate?
• Does your DAO plan to develop and air an application of any kind? If yes, are you planning to do it via major intermediaries such as Google Store, Apple Store, or any kind of intermediary that functions as a marketplace for apps?

In the case of saying yes or giving relevant answers in favor of establishing a legal entity to the questions above, then, it is probably time to think of seeking a legal entity for your DAO.

First of all, explanations regarding this table shall be examined at utmost care. Every DAO has unique features, therefore, please do contact your legal advisor.

Even though we strongly urge DAOs to have legal entity, if your DAO falls into the scope of Level 0–2 and doesn’t own a considerable amount of assets, then, your DAO probably will be fine without having a legal entity. As a DAO progresses and evolves, the liability of their members increases. After becoming a Level 3 DAO, obligations and debts a DAO tends to undertake vastly increase. To avoid unexpected personal liability, establishing a separate legal entity for the DAO is strongly recommended.

Risks of Having and Not Having Legal Entity

As mentioned above, liability for members is a risk. One may want to put forward the entity instead of its members when it comes to being liable for DAOs’ actions. If an entity is not legally acknowledged, as a rule, it cannot be a party of a contract or own property. If a DAO wishes to participate in such businesses, it is best to seek a legal entity.

The idea of legal entities emerged with the industrial revolution and growing need of coming up with a method of creating great amounts of capital via small individual savings. With the legal entity idea, a new entity which is entitled with rights and obligation, assets and liabilities formed. This legal entity is independent from real persons and in theory acts on its behalf.

In case of a DAO not having any legal entity, it may easily result in holding the founders or even the participants of the DAO as solely and personally responsible.

With the legal entity, this liability shifts from real persons to the entity itself and the real persons who participate in the entity are generally liable for the damages up to the amount that they committed. So, if a DAO does not have a legal entity, then, it is quite possible for it to be considered as an ordinary partnership and therefore a huge risk of liability for its founders and partners may emerge. Even though these said risks are sometimes hard to foresee and calculate, in the event of considering a DAO as an ordinary partnership, partners of the partnership are fully and personally liable for the debts and obligations of the DAO. To clarify, if the DAO fails to fulfill the debts and obligations it undertook, then, the partners are responsible to indemnify these debts and obligations. In this context even the personal and financial assets of a partner may be subject to liquidation. Depending on the amount of debt and obligations that a DAO undertakes, the risk may be roughly estimated. In conclusion, in the possibility that a DAO lacks a legal entity, as the amount of debt and obligation a DAO undertakes increases, the personal liability of the partners are increased accordingly. Depending on the said criterias, individual and specific examination shall be conducted for each DAO.

Furthermore, rights and obligations are generally entitled to those with legal personality. An organization that lacks a legal entity cannot pursue its rights and obligations via courts, or it cannot be part of legal relations. Moreover, it is not possible for an organization without a legal entity to be an owner of something.

To sum it all up, depending on how and under which name it gains legal entity, having a legal entity can be beneficial for the participants of a DAO for liability issues. With the legal entity established, the liability of the debts and other not preferable obligations shifts to the legal entity to some extent. Also, since the DAO with no legal entities cannot sue or be sued, the risk of not effectively pursuing or defending the rights of the DAO may emerge.

Main risk of having a legal entity for DAOs is the fact that with a legal entity comes a serious number of legal regulations and bureaucratic actions. For example, if a DAO is registered as an incorporation or limited liability corporation, almost every legal norm that is applicable to classic incorporations or limited liability corporations will be applicable to the DAO too. Also, the registration of a DAO as an LLC or something else is another bureaucratic and sometimes expensive procedure.

How to Create a Legal Entity for a DAO?

If you want your DAO to be part of legal relations such as being part of a contract, employing persons, owning assets, pursuing its rights in courts, then, you want your DAO to have a legal entity. With the DAO having a legal entity, it also means that founders and participants of the DAO will know the lengths of their liabilities. One other crucial perk that having a legal entity provides is the fact that the applicable law and regulations will be clear. There will be no room for discussion about the legal status of the DAO, which will provide serious clarity and predictability.

Depending on where you reside, challenges of creating a legal entity for a DAO may vary. There are two main pieces of legislation set forth in the U.S.A, namely Wyoming and Vermont. For example, in order to create a legal entity for the DAO in Wyoming, the DAO must be registered. In addition to the many other documents, statements and information for classic LLCs, information regarding the governance of the DAO via smart contract and a statement establishing how the DAO shall be managed by the members, including to what extent the management will be conducted algorithmically, must be issued. Also, to register a DAO in Wyoming, one must also have a Wyoming registered agent who meets the statutory requirements.

In conclusion, if you decide to create a legal personality for your DAO, you may establish your DAO as an LLC in Wyoming or Vermont. The requirements to establish a classic LLC in Wyoming and Vermont is the same for the establishment of a DAO as an LLC. Any person, even if they are not U.S. citizens, may establish a DAO LLC and start a business in the U.S.A.

Comparison for Possible Scenarios

Legal Wrappers: Partnerships

Pros (+)

• It is relatively hard to implement regulations and judicial actions against partnership.
• Acceptable for and applicable to for-profit DAOs.
• Does not require any bureaucratic and legislative procedure. Established instantly.
• Does not require any capital to have a partnership.
• Legal and administrative infrastructure is not necessary.

Cons (-)

• Partners have unlimited and personal liability for debts and obligations of a DAO.
• Lacks a legal entity, therefore it can’t exercise their rights and obligations by themselves.
• Cannot separately own property.
• Cannot enter into contracts.
• Non-applicable for non-profit DAOs.

Legal Wrappers: Unincorporated Society

Pros (+)

• It is hard to implement regulations and judicial actions against the society.
• Fit for non-profit DAOs.

Cons (-)

• Cannot possess property.
• Cannot enter into contracts.
• Members may be held accountable for the society’s debts.

Legal Wrappers: Business Trusts

Pros (+)

• United States considers business trusts to be independent legal entities, allowing them to sue and to be sued.
• Acceptable for and applicable to for-profit DAOs.

Cons (-)

• United States considers business trusts to be independent legal entities, allowing them to sue and to be sued.
• In contrast, business trusts, known as trade trusts in New Zealand and other jurisdictions, cannot be registered and are not legal organizations.
• A business trust’s constraint is that people holding trustee tokens can transfer the DAO’s property, which on the surface would violate the objective of a DAO because no single person should be able to transfer or otherwise dispose of the DAO’s property.
• Trustee token holders may face personal responsibility, and while they may have a right of indemnification against the DAO’s assets, the DAO’s assets may be inadequate.
• Not acceptable and applicable for non-profit DAOs.

Legal Wrappers: Foundations

Pros (+)

• Fit for non-profit DAOs.
• Having a legal entity makes it possible for them to exercise their rights and obligations, to sue or to be sued, etc.

Cons (-)

• Not applicable to for-profit DAOs.
• Having a legal entity makes it possible for them to exercise their rights and obligations, to sue or to be sued, etc.

Legal Wrappers: Limited Partnerships and Limited Liability Partnerships

Pros (+)

• Many governments recognize limited partnerships (LPs) and limited liability partnerships (LLPs).
• Enables some or every member of it to have limited liability.
• Having a legal entity makes it possible for them to exercise their rights and obligations, to sue or to be sued, etc.
• Acceptable and applicable to for-profit DAOs.
• Provides a foreseeable liability and regulation.

Cons (-)

• LPs have limited utility for DAOs and are not an acceptable legal structure for the majority of non-profit DAOs.
• Relevant applicable regulations and legislations shall be examined and acted accordingly.
• Requires legal and administrative infrastructure.
• Establishment and aftermath may require a significant amount of capital.
• Different types of tax rules may be applicable.

Legal Wrappers: LLC (Namely; Wyoming, Vermont, Tennessee)

Pros (+)

• LLCs are registered entities that provide their members with limited liability.
• Fit for for-profit DAOs.
• Provides a foreseeable liability and regulation.
• Having a legal entity makes it possible for them to exercise their rights and obligations, to sue or to be sued, etc.

Cons (-)

• Most jurisdictions do not provide LLCs as a legal structure. Those jurisdictions recognize LLCs as viable legal formations and enable LLCs to sue and to be sued in their jurisdiction.
• DAO members are not individually accountable for the LLC’s obligations, they may still be liable for their own torts, such as if a member designed a smart contract poorly.
• Requires capital.
• Legal and administrative infrastructure is a necessity.
• Different types of tax codes will be applicable.
• Mostly non-applicable to non-profit DAOs.

LEGAL DISCLAIMER

THE INFORMATION PROVIDED IN THIS PAPER PROVIDES GENERAL INFORMATION AS TO THE POSSIBILITIES IN MULTIPLE JURISDICTIONS. PLEASE KEEP IN MIND THAT LAWS THAT APPLY TO THE SUBJECT HEREIN MAY DIFFER IN EACH JURISDICTION. THUS, NOTHING CONTAINED HEREIN CONSTITUTES ANY LEGAL OPINION OR SUGGESTION OF ANY KIND. PLEASE CONSULT TO LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.