A DAO LLC is a new business structure that allows people to do business online using a public blockchain. Here’s what you should know.
What is a DAO?
A DAO (Decentralized Autonomous Organization) is an online organization that is owned by its members and governed by a smart contract—a predetermined set of rules that are encoded in a digital database called a blockchain. A DAO does not have to be a business, but many are. What makes DAOs different from traditional businesses is that no one person is in charge of them. Instead, the smart contract determines the rules of the business, including the rules for how members can vote to take action.
In addition to containing the rules for the DAO, a smart contract also contains “tokens” (usually cryptocurrency of some kind) that it distributes to its members according to the predetermined rules. Usually, the amount of tokens a member has determines their voting power. Members can make and vote on proposals, and the smart contract instantly enacts the action members voted for.
The benefit of a DAO is that a member does not need to know (or even trust) the members they do business with because all action is automated through the blockchain. The code of a smart contract can’t be changed, so it is nearly impossible to corrupt. And since the blockchain is public, anyone can see the changes that have been made, so DAOs are more transparent than a traditional business model.
Can a DAO Be an LLC?
Yes, but currently only in Wyoming and Tennessee. In 2021, Wyoming passed WY Senate Bill 38, making it the first state to allow DAO LLCs or LAOs (Limited Autonomous Organizations). In April 2022, Tennessee became the second state to allow LLC registration for DAOs, by passing HB2645 and SB2854.
Why start a DAO LLC?
Up until now, the problem with DAOs has been that they have no liability protection. Legally, a DAO is treated like a general partnership, where individuals go into business together without filing paperwork to create a formal business structure. And like in a partnership, in a DAO if one member is sued or goes into debt, the other members can be held liable, even if they’ve never met or spoken to this person.
However, when you form a DAO LLC, the DAO is considered a separate legal entity from its owners, which means that the business assets are considered separate from the members’ personal assets, and members can’t be held personally liable for damages against the business or against other members.
Do I need a registered agent for a DAO LLC?
Yes. Even though DAOs are online-based companies, a DAO LLC needs to appoint a registered agent based in the state where they are registered. Since DAO LLCs are currently only legal in Wyoming and Tennessee, you would need to either appoint a Wyoming registered agent or a Tennessee registered agent, depending on which state you’re based in.
A registered agent’s job is to accept legal notices from the state, including potential lawsuits. A member of your DAO could serve as your registered agent, if they live in the state you’re based in. However, this person would have to put their name and physical address on the public record, which jeopardizes the anonymity that is one of the main perks of a DAO. Hiring a registered agent who will put their address on the public record instead of yours is a way to protect your privacy.