Starting a DAO? Consider incorporating, Traxa did.
Disclaimer: The Traxa DAO LLC is not a legal service organization nor should any of the content of this article be taken for legal advice. This article’s intent is to share our experience and journey, and to provide a subject of consideration for the reader.
There are many decisions to make when starting a DAO (Decentralized Autonomous Organization). These decisions impact whether the DAO will flourish or fade within the community it represents. Although DAOs exist in the global web3 universe that cross geographical and political boundaries without friction, the traditional world has rules and regulations that still exist. An important decision then is whether to tie the DAO to an existing regulatory framework within a specific country — or not. This article explores what the benefits are, how you could approach creating a DAO and why Traxa.io chose to create a legal entity through forming an LLC in the State of Wyoming, USA.
First, a quick recap on a DAO. A DAO is a Decentralized Autonomous Organization that is run by programming code or “smart contracts” on a blockchain. The business logic is also written in the form of smart contracts, which are executed on the blockchain.
- The rules and regulations are enforced by the blockchain and all transactions are recorded in an immutable public ledger.
- A DAO is an organization that does not rely on a single point of failure. It is also democratic and transparent because it has no central authority or middleman.
- A DAO can be programmed to receive funds from investors, perform functions, and distribute profits to shareholders according to pre-set conditions.
- A DAO can be used for various purposes, such as voting, running a business, raising money through crowdfunding and so on.
The legal status of a DAO is still unclear, which makes the liability of the DAO also unclear. As more and more organizations are adopting blockchain technology to create their own DAOs, the issue of legal status becomes more pressing. When the liability is unclear, it puts the participants of the DAO at risk. If the government, another organization or even an individual decides to take legal action against the DAO, the participants could be at personal risk.
Risk stifles innovation. DAOs rely on participants to move the organization forward. These participants often volunteer their time early in a DAO. Why would someone expose themselves to the liability of the DAO when there isn’t even any reward in view?
This is where establishing a DAO LLC comes in when considering setting up a DAO. Forming a traditional LLC is a common practice for businesses that want to reduce their taxes and grow. There are many reasons why it is beneficial for an organization to set up an LLC. Some of these reasons include protection from liability and making tax payments on behalf of the company, which can be very convenient. By creating a DAO LLC, the DAO itself becomes liable, not the participants. Similar to a traditional LLC, any action against the DAO would be for the resources of the DAO, not the personal property of the participants. Just like any traditional LLC, a DAO LLC has to pay its taxes as well. A DAO LLC makes it easy to pay taxes both for the organization itself and to remain accountable for any compensation it makes to others for services rendered (such as through 1099).
Believe it or not, there are currently only a few places in the United States where you can form a limited liability corporation (LLC) for a DAO LLC — one of which is Wyoming. Other states are considering setting up DAO legal entities, but Wyoming was the first to do so. Forming a DAO LLC is a simple process and can be done in a day. However, there are some steps that you need to take before you register your company. One of the first things that you need to do is to decide on the name of your LLC. You should also check if the name is available and reserve it with the State where you are registering. It is advisable to also create a company logo and make sure that you have all the required documents for registration. A Wyoming-based DAO LLC is a company that is registered with the Secretary of State. It provides limited liability to the members for their obligations and debts. Here’s what’s really cool. At this time, it is not required to have any names on the articles of formation- just a smart contract address for the smart contract of the DAO.
How much does it cost? $100. That is if you do it yourself. You can actually find law firms in Wyoming that will take care of all of it for you from $500USD to $999USD, ensuring it is set up successfully.
Limited paperwork, relatively inexpensive and risk protection. Why wouldn’t you incorporate? There are some decentralized services that don’t touch the ‘real world’ such as DeFi and the Metaverse (Yet). It seems though over time even those organizations will get pressure to form a legal entity otherwise the government may take action preventing operations in that country.
Traxa does touch the real world. Traxa is a community-driven logistics tracking platform for intermodal shipping containers. Its value is to capture and report on items from the real world and store them in the Web3 metaverse. For these reasons, the founders formed the Traxa DAO as an LLC. They didn’t even have to go to Wyoming.
Forming an LLC for the DAO? Check. What’s next? Governance around that DAO smart contract address we mentioned. That smart contract address is essentially the key to the entire DAO, from it’s treasury through to encoding rules on how the DAO functions. In the next article, we’ll discuss the governance of the smart contract and why, even though you have a real-world corporation for the DAO, you don’t need a bank account.