*None of the following should be construed as legal or financial advice, every case is specific and every project is unique.
OVERVIEW:
DAOs sometimes do not choose to register or incorporate. If the Organization exists on a blockchain, founders and members consider that it does technically live. This statement is far from being accurate because any and all governments with a potential interest in the DAO have jurisdiction. This means that the DAO could have to comply with different jurisdictions moving forward, making legal implications even harder.
The default position in the United States is that DAOs are general partnerships. This means that all members of a DAO are legally liable for the actions of one member. This possibility may make it unpalatable for members to join. Therefore legal wrappers for the DAOs that shield its members from the legal liability of the others are sometimes helpful and not too difficult to administer.
TYPES OF STRUCTURES
Limited Liability Company.
A Limited Liability Company (“LLC”) is a type of private Organization in the United States. This corporate structure shields members (in the legal context they are considered “owners”) from legal liability. This means that if Member A is sued for whatever reason, Members B, C, and D do not have to worry about their own liability.
Benefits:
- Legally incorporate quickly;
- Accept money and distribute shares soon;
- Modify a standard LLC operating agreement to allow us the flexibility to migrate smart contracts in the future as well as bake in a fluid share structure;
- Potentially integrate smart contracts to memorialize and automate the agreements for elected members;
- Define a light-weight KYC process so that you can ensure legal compliance without jeopardizing the privacy of members.
Some states like Vermont and Wyoming have developed special frameworks, especially for DAOs. However, these benefits should be weighed against the kind of liberal and reciprocal nature of corporate law in more popular state jurisdictions like Delaware.
TAX CONSIDERATIONS
An LLC is a “pass-through” organization from a tax perspective. This means that the Organization’s assets are each member’s assets. An LLC can opt to be taxed as a partnership or as a corporation. If a DAO elects to be taxed as a corporation, it is likely you will need to make this “check-the-box” election within 75 days of legal incorporation.
The Organization will need to file taxes as a company itself and issue tax forms to those who receive payouts from the DAO. However, if a DAO is not profit-seeking (ie there is not any revenue leftover at the end of a fiscal year) the DAO will only need to pay gains/losses that are standard with holding cryptocurrency.
501(c)(3) FOUNDATION.
This type of corporation uses its surplus of funds to advocate for a specific cause. It is a tax-exempt organization. The advantages of a foundation are that members who contribute to the DAO could write it off on their taxes. However, incorporating a foundation takes months to incorporate after a fairly extensive application process. Additionally, there are more burdensome annual reporting requirements that demand information on the board of directors, details on grants made, as well as personal information of key employees.
CO-OPERATIVE.
A co-operative allows a group of people to jointly own and manage their business or activities. This type of structure is most beneficial when there is a desire to evenly distribute profits among members. It is required that a co-operative maintain a ledger of members that includes some personal information which is then disclosed to authorities annually.
INTERNATIONAL JURISDICTIONS
There are many, many jurisdictions to incorporate crypto companies in. When determining jurisdiction, one thing to consider is to remember who the beneficial owner of the company is/are. For example, in tax haven countries like the British Virgin Islands, or Seychelles, tax liability flows down to who the beneficial owner of the company is. So generally, a tax haven could be beneficial for the company, but not necessarily the owners of that company.
CRYPTO-FRIENDLY TRADEFI BANKS
Note that many (but not all) crypto-friendly banks continue to require minimum deposit amounts for company accounts.
- Deltec Bank (The Bahamas)
- Signature Bank (US)
- Mercury (US digital bank)
- M.Y. Safra (private Israeli bank)
- Silvergate (US bank)
- Revolut (Lithuanian neobank)
Basically, you would have several options to register a Web3 entity, here are a few:
- A Delaware entity
- A Wyoming entity
- A Lithuanian entity
- A Singapore entity
- And other entities depending on the structure and need of the project.
Finally, remember one thing. Web3 is not a new world, it is a step forward and most Web3 structures still do apply and can be implemented in order to operate a crypto, NFT, and/or Blockchain project.
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