What Is a DAO LLC? All You Need to Know
A Decentralized Autonomous Organization Limited Liability Company, aka DAO LLC, is a Limited Liability Company organized and operated according to the laws of a particular state. The members of a DAO LLC are not personally liable for the debts or obligations of the company. At this time, DAO LLCs are not offered in every state so you’ll need to check with your state’s government.”
A DAO LLC is formed by filing Articles of Organization with the secretary of state’s office in the state where the company will operate. These articles must contain certain information, including the name and address of the LLC and its organizers and a statement of its purpose. The Articles of Organization may also set forth other provisions that will govern the operation of the LLC.
How does DAO Work?
After filing the articles, one can begin conducting business. Like any other business entity, a DAO LLC must follow certain rules and regulations to maintain its limited liability status.
A DAO LLC offers many benefits, including flexibility, limited liability, and pass-through taxation. This type of business structure has a lot of use cases since it allows the members to pool their resources and minimize their risk.
Suppose you are thinking about forming a DAO LLC. In that case, it is important to consult an experienced business attorney.
Alternatively, you could hire an LLC filing company. It’s common that filing companies can also serve as the Registered Agent for your LLC. A Registered Agent is a person or business that agrees to receive legal papers on behalf of your LLC. The Registered Agent must have a physical address and be available during regular business hours. For instance, if you are forming an LLC in Texas, the agent must have a local address in Texas and can be available during business hours.
You can list yourself as the LLC’s Registered Agent too. You just must be a resident of the state and have a physical address. On the other hand, if you’d rather not be your own Registered Agent, you can hire a Commercial Registered Agent, aka a professional Registered Agent service.
The Advantages of a DAO LLC :
- Limited liability protection for the owners
- Flexible management structures
- Pass-through taxation
Disadvantages of a DAO LLC
- Lack of control: Because the DAO is decentralized, members may have difficulty reaching a consensus on important decisions. It could lead to gridlock and inefficiency.
- Volatility: The price of the underlying cryptocurrency (such as Ethereum) could fluctuate wildly, leading to losses for the DAO LLC (if the DAO holds large reserves in Ether).
There are a few tools that can help with these disadvantages. One is called Aragon, a platform for building and managing decentralized organizations. Aragon provides a user-friendly interface for setting up and managing DAO LLCs (and other types of decentralized organizations).
Another tool is Colony, a platform for building decentralized companies. Colony provides a suite of tools that makes it easy to set up and manage DAO LLCs (and other types of decentralized organizations).
How does DAO Work?
DAOs can be run by smart contracts or their members instead of relying on traditional management structures. Hence, a group of people doesn’t centrally control the organization; it is decentralized and controlled by its members.
The code that runs a DAO is called a smart contract. A smart contract is a code stored on the blockchain. It can automatically execute certain actions on fulfillment of specific conditions. For example, a smart contract could send money from one person to another when a certain action is completed.
Additionally, DAOs are transparent, i.e., their members can see how they function and what decisions are being made. Consequently, they can help prevent corruption and treat everyone fairly.
Finally, DAOs can be much more democratic than traditional companies, as they are under the control of their members. It is unlike the traditional businesses, where authoritative structures like the board of directors execute decisions.
How Can I Create a DAO LLC?
If you are interested in creating a DAO, there are a few things you will need to do the following:
- Find a state where you can form a DOA LLC. For example, this can be done in Wyoming.
- Name your DAO LLC. The name must include the words, or abbreviations, “DAO LLC”.
- File the Articles of Organization with the state government.
- Prepare an Operating Agreement for your DAO LLC.
- Get an EIN from the IRS.
- Open an LLC business bank account.
Creating a DAO can be a complex process, but there are a few resources that can help you get started:
- The Ethereum Foundation’s “DAO Creator Course” is a great place to start if you’re interested in creating a DAO.
- The Solidity documentation is a helpful resource if you want to learn more about smart programming contracts.
- Finally, the DAO subreddit is an excellent place to ask questions and stay up-to-date on the latest news and developments in DAOs.
What are Some Successful DAOs?
There are already several successful DAOs in operation.
The MakerDAO is a popular example of a DAO that has successfully stabilized the value of its native cryptocurrency, MKR. Another example is MolochDAO, a DAO that helps fund Ethereum infrastructure projects.
Risks of DAO LLCs
There are also a few risks associated with DAO LLCs.
- It can be hard to reach a consensus among the owners on important decisions due to a DAO’s decentralized nature. It can lead to decision paralysis and make it difficult to get things done.
- DAO LLCs are still new and don’t have established case law. There are still some unknowns, and it is unclear how they will perform in the real world.
- DAO LLCs could be subject to attack by malicious actors. For example, if someone manages to gain control of more than 50% of the voting power, they could make changes that not everyone agrees to.
DAO LLCs are a new and exciting way to set up and run a business. They offer several benefits, including liability protection, flexibility, transparency, and trustlessness. However, they also come with risks, including decision paralysis, regulatory scrutiny, and possible attack by malicious actors.
If you are considering setting up a DAO LLC, it’s crucial to weigh the pros and cons before deciding.
Matt Horwitz is the founder of LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, Entrepreneur Magazine, and the US Chamber of Commerce. Matt holds a Bachelor’s Degree in business from Drexel University with a concentration in business law. LLC University®, established in 2010, was the first company to create free LLC courses in all 50 states.
Cory Maki is a Staff Editor and the Business Development Manager at Grit Daily. Email [email protected](dot)com for PR pitches, advertising, and sponsored post inquiries.