Are DAOs Established Legal Entities?
What is a DAO? Are DAOs legal? How to setup a DAO legally.
David Akiloon May 29, 2022.
Decentralized Autonomous Organizations, or "DAOs," are community-run organizations powered by blockchain technology and smart contracts without a centralized authority. They are entirely decentralized and open to public scrutiny at any time: smart contracts establish the basic rules and carry out the agreed-upon choices, requirements, proposals, and voting.
The individual members that make up the DAO control its fate by presenting proposals for the rest of the community to vote on. This approach to organization building is in stark contrast to traditional companies with a CEO or a select board of directors that run everything. A DAO is much more democratized as every member comes together to make important choices regarding the project's future, such as financial distributions and software updates.
Are DAOs Legal?
Most jurisdictions don't recognize DAOs as legal entities, hindering public knowledge and recognition. This shouldn't come as a surprise since the DAO phenomenon is still relatively new, and the space is still evolving.
Moreover, in the absence of legal recognition, a DAO doesn't have to comply with any state's registration laws and doesn't require corporate rights like a limited liability company. While this may appear advantageous on the surface, there are some demerits to unclear regulations regarding DAOs.
For instance, a DAO's lack of legal standing may prevent it from entering business relationships with other companies or the government. This limitation may restrict the DAO's business and its profits. Since DAOs are unrecognized by the law in most places, this presents a huge barrier to the public's understanding and acceptance of these organizations.
How to set up a DAO Legally
Since there are no proper regulations regarding DAOs, there is no exact formula for creating one legally. However, one must bear the following points in mind before proceeding with building a DAO.
- DAOs don't follow the existing corporate world hierarchy of having a board of directors and corporate executives.
- DAOs aren't corporations, so they do not enjoy the legally backed protections against liabilities as corporate bodies do.
- Decision-makers are honed from the bottom up and not the other way round as obtained in the corporate world.
- Even though DAO mimics the values and expectations of a corporate entity, it does not have the same privileges.
So, starting a DAO will vary depending on the country and jurisdiction that the creators of the DAO are interested in targetting.
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