Many people believe that in 2023, the year of the DAO, there will be an increase in the number of decentralized autonomous organizations, as well as significant advancements in software that makes it easier for anyone to start one. So it’s likely that in 2023, the DAO will be in compliance with the law, but will that be the year that DAOs start following the law?
If you’re not registered as a legal entity, you’re basically not recognized by governments.
:legal status is important in the modern economy. For a company or organization, the first step is to create a legal entity. This can be done in the form of a corporation, a foundation, or an LLC.
The problem is, if a group of people engage in a common enterprise without a legal entity, the law treats them as a general partnership.
What’s the big deal with being a general partnership (GP)?
There are several problems. In a general partnership, each partner is responsible for the actions of the partnership and for the actions of any other partners involved. If something goes wrong with a DAO, such as fraud, a hack or an accident, any of the other members of the organization or people outside the organization can sue you as an individual member and go after your money, your home and everything you own.
The second issue is that a general partnership is not considered a legal entity with its own rights and responsibilities – meaning it doesn’t have the same level of legal protection as a corporation. This means that the company can’t do things like open bank accounts, buy and own property, sue and be sued or hire employees. Most DAOs will want to own the intellectual property of their own logo and trademarks.
Third, when a general partnership makes money, the individuals involved in the organization are personally liable for taxes on those earnings. If you are part of a general partnership, you will have to pay taxes on a percentage of the organization’s profits. Most people think the same thing about DAOs as they do about corporations – that they’re a good way to manage and decentralize a company’s operations, but few people have actually explored the potential of DAOs yet.
Most DAOs (including all the unincorporated ones) have all three of these problems. The DAOs don’t have to pay their members anything when they make profits, because they’re owned by the community. Therefore, it is just a matter of time before the tax man (U.S. The DAO members get caught by the IRS and find out that they owe taxes they haven’t been paying. And when more unincorporated DAOs and their members start getting sued, they will find that they are not following the law that they would need to follow to avoid the associated personal liability.
How can decentralized autonomous organizations (DAOs) implement with the law?
In early 2021, there weren’t any good DAO incorporation options available. Only entities that made a lot of compromises were allowed to be legal. For example, these types of organizations would need to keep a list of members’ full names and addresses, elect a board of directors or trustees who would have power over the organization, and keep written records of decisions made at meetings.
In 2022, something different happened. Today, decentralized autonomous organizations (DAOs) can choose to work with law enforcement and legal systems. Several jurisdictions now recognize DAOs as a new form of human organization. DAO LLCs are found in Wyoming, Tennessee, and the Republic of the Marshall Islands. They’re highly flexible and powerful legal entities that are perfect for DAOs. Some DAOs have used Colorado Limited Cooperative Associations (LCA) or Unincorporated Nonprofit Associations (UNA), while others have chosen to create foundations in Switzerland, the Cayman Islands or the British Virgin Islands.
Hundreds of DAOs have incorporated in these jurisdictions since the beginning of this year, which has granted those DAOs access to banking, protected their members from personal liability, and ensured the DAOs can pay their own taxes. For nonprofit organizations, incorporating usually means getting a tax break.
Can there be real decentralization if the law is enforced?
Some DAO members worry that incorporation will make their DAO less decentralized, which goes against one of the core values of Web3. A DAO with legal entity status is seen as having more points of failure than an unincorporated DAO, which may make it more susceptible to censorship. But remember, the entity’s main purpose is to be a legal target for anyone who wants to sue the DAO. If the legal entity is ever sued and forced to sell assets or go out of business, the DAO members will not lose their tokens, governance smart contracts or ability to reorganize and resume operations. Having an entity does not create a new target; it just moves the old target away from DAO members as individuals.
A legal entity offers benefits such as the ability to set up governance rules that make the organization decentralized. If an unincorporated DAO becomes too centralized, it has no recourse against a small group of individuals or a powerful third party.
The crypto community learned this year that even things that seem trustworthy can be corrupted, and people can be selfish. Some people hope that the wakeup calls from Celsius Network and FTX in 2022 will show the need to decentralize assets and decision-making, and will lead to a renaissance in DAOs. DAOs will become more efficient and streamlined, so they will be as easy to participate in as checking your Telegram messages. To get to the next level, you need to make a handshake agreement with the existing legal system in order to allow DAOs to mature and integrate with the global economy. Doing so does not require a compromise in decentralization and can help make 2023 the year of the DAO.