A Decentralized Autonomous Organization or DAO LLC is a new type of LLC that combines the benefits of blockchain technology with that of traditional LLCs. Also known as a “limited liability autonomous organization” or “LAO,” the purpose of a DAO LLC, as the name implies, is to provide an alternate method of management over an LLC by taking the control from human member/managers to a digital and algorithmic method of management with little human involvement, if possible.
One key difference between a traditional LLC and a DAO LLC lies with the day-to-day operational terms of the companies. A traditional LLC is controlled by an Operating Agreement which is a physical contract created by the member/managers of the LLC. The Operating Agreement will usually contain membership shares, voting rights, taxation, and the overall management structure of the LLC. The document is kept with the members of LLC and is a tool by which members of an LLC may be identified and prove that they have the authority to act on behalf of the LLC. Depending on the terms of the Operating Agreement, decisions may require votes or member/manager intervention to function or take action.
In contrast, a DAO LLC is controlled by the rules of a “smart contract.” A smart contract is a self-executing program stored on a blockchain that enforces and manages some aspects of the agreement without the requirement of human intervention. It is an automated transaction that is “comprised of code, script, or programming language that executes the terms of an agreement which may include taking custody of and transferring an asset, administering membership interest votes… organizing or issuing executable instructions for actions based on the occurrence or nonoccurrence of specified conditions.” (W.S. 17-31-102 (a)(ix)).
The conditions of a DAO LLC are written in code rather than legal verbiage and trigger upon events that are input into the smart contract. This means that, ideally, the day-to-day functions of the LLC will not require the intervention of a member to take place. Instead, the smart contract should make the necessary distributions, move shares, and perform management tasks upon a triggering event. Additionally, “membership interest” in a DAO LLC can be a digital asset or security so long as it is defined within the Operating Agreement of the LLC.
There are some cons to a DAO LLC. First, it is a very, very new type of business structure which means there are little to no regulations outside of the states that permit their formation. Second, only two states permit the formation of a DAO LLC at this time—Wyoming and Tennessee. Third, anything new will have risks involved, and it’s difficult to determine exactly what all of those risks are.
Despite that, DAO LLCs might be the future. DAO LLCs have flexible management structure, are (theoretically) less fallible to human error, and exist on secure networks that can provide certain protections for members and their transactions. DAO LLCs may be desirable for future business owners who operate in the digital space or want an untraditional method of management over their company.
This blog post is meant to be informative and should not be considered legal advice.
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