Guide to DAO Legal Wrappers: Best Practices, Frameworks & Jurisdictions
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Exploring the DAO legal wrapper options for your organization? Want to understand how a legal wrapper can make the DAO work better and follow regulations? Continue reading this educational article by DAObox to learn everything you need to know before creating a legal wrapper for your DAO or Web3 collective.
Decentralized Autonomous Organizations (DAOs) have emerged as powerful structures for collective decision-making and management in the blockchain space. However, the legal landscape for DAOs remains complex and often challenging to navigate. This article delves into the world of DAO legal wrappers, exploring the frameworks, considerations, and key insights necessary for creating effective legal structures.
We designed this article as an educational guide for anyone looking to establish a DAO legal wrapper or structure a Web3 organization, and for those interested in understanding the essential concepts. In this material, we explain the major forms of legal wrappers and their features, share our top five things to know before creating a DAO legal wrapper, and provide practical tips for designing them.
A DAO legal wrapper is a legal entity that a DAO employs to operate within existing legal systems, gaining separate legal personality, limited liability, and tax protection. A well-designed wrapper essentially provides a legal framework for a DAO to interact with traditional financial and legal systems, and shields members against risks, while maintaining their decentralized nature.
Currently, the main reasons why a DAO would want to become legally structured and establish a legal wrapper include:
Limited Liability: The No1 reason for having a legal wrapper is to exclude DAO members’ and core contributors’ personal unlimited liability for the obligations of the DAO.
Separate Legal Personality: This provides the DAO with legal recognition, allowing it to enter into contracts, own property and IP, open fiat payment accounts, manage infrastructure, grants, sue or be sued as a distinct legal entity.
Tax Optimisation: A properly structured legal wrapper allows for tax optimisation, potentially reducing the overall tax burden and mitigating personal tax risks for the DAO members and contributors.
Step into Light: People “in the know”, such as large VCs, auditors and vendors, tend to engage less with unstructured DAOs due to regulatory considerations and potential legal risks involved. Ultimately, this means that, at some point, any developing DAO would want to become legally wrapped.
For the purposes of legal wrapping, DAOs can be categorized based on several essential parameters. Understanding these categories and parameters is crucial for selecting the most appropriate wrapper for your DAO.
Unstructured (Entityless): These DAOs operate on-chain, without a formal structure or legal wrappers. While this may preserve the 'decentralized ethos' of the DAO, it often presents challenges in gaining legal recognition and protecting members and core contributors against liabilities.
Partially Wrapped: In a ‘partially wrapped’ DAO, only certain siloed activities are wrapped, while the larger organization itself remains not wrapped and continues to exist largely as is. An example of this would be wrapping a grants program initiated by the DAO or setting up a separate grants sub-DAO wrapper.
Fully Wrapped: The whole DAO, i.e. the DAO members and community, is wrapped and the legal wrapper essentially ‘absorbs’ the DAO, fully or partially. In a fully wrapped DAO, the members of the DAO become members of the legal wrapper.
Recent regulatory enforcement actions and legal cases, such as the class actions against Compound DAO and LIDO DAO, underscore the significant legal risks and liabilities associated with entityless DAOs and partially-wrapped DAOs. These risks impact not only DAO members but also major contributors, supporters, and investors. To mitigate these risks and enhance DAOs' legal standing, we recommend implementing a Base-layer legal wrapper for DAO communities, complemented by Operating-layer wrapper(s) where appropriate.
Non-Profit DAOs: These organizations do not distribute profits among DAO members and, in return, can often exist in essentially tax-free environment.
For-Profit DAOs: In a for-profit DAO, the members of the DAO can receive distributions, and the organization is often required to pay and account for taxes.
Member-Managed DAOs: In member-managed DAOs, governance is exercised by members through voting mechanisms. Smart contracts and venues like Snapshot facilitate the voting processes, ensuring that decisions reflect the collective will of the members.
Algorithmically-Managed DAOs: Algorithmically-managed DAOs are governed by smart contracts with pre-set rules, reducing the need for human intervention and enhancing automation. Members of algorithmically-managed DAO normally do not exercise governance via voting.
Before a DAO approaches the legal wrapper design stage, it is crucial that their key contributors understand and are aware of the five important considerations outlined in this section. This awareness will enable them to better grasp the opportunities for legal wrapper structuring on an international scale and see the 'bigger picture'.
Since this is not obvious to many, let’s put it straight: a DAO can have multiple legal wrappers that coexist, each responsible for different activities or development directions. A DAO can combine several partial wrappers or even a full wrapper with one or several partial wrappers (types discussed below).
In response to recent developments, DAObox has introduced its Multi-Layered Wrapper (MLW) Framework for DAOs, which advocates for implementing multiple layers of legal wrappers to enhance DAOs' legal protection and operational efficiency. In this structure, the Base-layer wrapper encompasses the DAO community, providing a foundational legal entity, while the Operating-layer wrapper(s) are designated for specific activities or transactions.
Another important consideration is that majority of legal wrappers do not protect the DAO by default and in all respects. Therefore, in this case, to benefit from limited liability and an additional layer of protection, the DAO must engage in relevant activities specifically through the wrapper.
In other words, the legal wrapper protects the DAO from liability only in transactions where the wrapper is the counterparty or actor. This, however, does not apply to DAO-Specific entities (DSEs), such as DAO LLCs or DUNAs, which are specifically designed to 'merge' with the members of the DAO.
The Web3 regulatory landscape is constantly evolving and changing across the globe, becoming more comprehensive and complex. One of the mistakes a DAO could make in the legal design is incorporating in a jurisdiction where wrapper's anticipated activities would trigger undesired compliance burden, for example, under the VASP laws or local financial, securities or economic substance regulations.
Therefore, it is important to account for the purposes of the anticipated wrapper and its planned activities to ensure compliance and avoid any unnecessary or undesirable regulatory implications. Jurisdictional and regulatory shopping sometimes is also available.
Since some forms of legal wrappers do not allow for making distributions among members and stakeholders, it is important to understand whether the DAO makes or intends to make distributions to its members, and whether the anticipated legal wrapper will be used to make or process such distributions.
Distribution restrictions normally apply to legal wrappers which are non-profit entities, for example, majority of DAO foundations. Some wrapper forms/jurisdictions allow to choose between for-profit and non-profit status, therefore, permitting the wrapper to distribute assets among its members but requiring to pay taxes instead.
DAOs may combine for-profit and non-profit legal wrappers for better agility in terms of treasury and asset management.
A legal wrapper, like any other corporate body, is subject to certain legal and regulatory requirements depending on the laws of its jurisdiction. One such requirement includes the reporting of ultimate beneficial owners (UBOs). Although this varies by jurisdiction, UBOs typically refer to individuals with 10-25%+ of voting power in the DAO or those exercising control through other means.
DAOs must identify and disclose UBOs to registered agents and, in some cases, government authorities. At least one UBO must be reported, typically a manager (director, supervisor, protector) if no other controlling person exists. UBOs must disclose their identity and undergo KYC (Know Your Customer) checks.
This requirement can be particularly challenging for DAOs and Web3 organizations, as key contributors often prefer to remain anonymous to avoid legal exposure. To address this, DAObox offers its specialized DAO wrapper management service, where we assume the role of a director (or a similar position) within the legal wrapper, undergoing all necessary checks and screenings on behalf of the DAO. This approach allows contributors to maintain their anonymity while ensuring the wrapper remains compliant and properly managed.
Not all legal entity forms are suitable for use as DAO legal wrappers. The ones that are can be divided into two main categories, depending on whether these wrappers can "wrap" the entire DAO or only specific siloed functions or activities.
Partial wrappers are not suitable for wrapping the entire decentralized organization, but they can be employed for wrapping its specific functions, activities, or property. Regardless of the number of partial wrappers a DAO may have, the DAO, as it exists on-chain, will co-exist with these wrappers from a legal standpoint.
A partial legal wrapper does not "absorb" the DAO community. The members of the DAO do not become members of the legal wrapper and can only obtain limited indirect governance rights with respect to the wrapper.
Partial legal wrappers include:
Overview: Ownerless foundation is an orphan legal entity without shareholders that combines features of corporations and trusts. Created for specific predetermined purposes, this entity can outlive the founding team and core contributors of the project, potentially lasting indefinitely — as long as it can finance its operations and has objectives to pursue.
Jurisdictions: Switzerland, Cayman Islands, Panama, Seychelles, Nevis, Cook Islands, Liechtenstein, and others.
Overview: A membership-based entity that offers a certain degree of flexibility in governance and operations. Normally, associations are required to have members who must undergo regular onboarding procedures, making it impossible to admit all DAO members as association members based on token holding.
Jurisdictions: Switzerland, Luxembourg, Liechtenstein, and others.
Overview: In our context, a trust refers to a contractual arrangement for managing specific property attributable to the DAO. A trust does not imply the formation of a separate legal entity, but allows the trustee (manager) to hold and manage the property entrusted by the DAO for certain purposes, separately from the trustee’s own estate.
Jurisdictions: Guernsey and others.
Overview: Depending on the circumstances, this entity can have no shareholders and be non-profit, with the board owing fiduciary duties to the purposes of the company rather than to the interests of shareholders. Proper structuring is required to ensure that members have limited authority and no ownership or distribution rights.
Jurisdictions: Singapore, BVI, Hong Kong, and others.
Unlike partial wrappers, a full DAO wrapper is designed to wrap the members of the decentralized organization (i.e., token holders) and, from time to time, certain of its property or activities. These entities can normally incorporate smart-contracts in their governance, keep the member registry on-chain, and have no officers and directors.
In a full wrapper, the members of the DAO are typically recognized and admitted as members of the legal wrapper based on the token holding criterion alone. This means that as soon as a person becomes a token holder, the legal wrapper can consider it a member, no KYC required.
This allows the legal wrapper to effectively "absorbs" the members of the DAO, as well as certain DAO activities or property, merging the DAO governance with that of the legal wrapper.
Full wrappers include:
Overview: Unlike traditional LLCs, a DAO LLC can admit as members all persons holding the DAO’s governance tokens, without having them to undergo onboarding, KYC and other legal formalities, granting the token holders direct governance rights and limited liability by default.
Jurisdictions: Marshall Islands, Wyoming (USA), Utah (USA), and others.
Overview: DLT Foundation is a special form of foundation that can be established in ADGM (UAE), designed specifically for blockchain-based organizations. Can be used to engage in DAO-related activities and even issue a token, which, however, must be in compliance with fairly strict regulatory requirements.
Jurisdiction: ADGM (UAE).
DUNA
Overview: The DUNA (Decentralized Autonomous Non-Profit Association) is a new specialized structure for DAOs that combines elements of a traditional LLC with DAO-specific governance features. Same as any association, this is a membership-based organization. However, a key limitation is that DUNA can currently only be formed in Wyoming, USA, which may deter organizations concerned about US regulatory exposure and jurisdictional risks.
Jurisdictions: Wyoming (USA).
DAO Association
Overview: The DAO Association is a special form of company limited by guarantee, specifically designed to cater to decentralized organizations. This entity is established under the DAO Association Regime (DARe), recently introduced by the RAK Digital Assets Oasis (RAK DAO) in Ras Al Khaimah. A DAO Association can issue tokens and participate in blockchain activities but must ensure compliance with local regulatory requirements. Additionally, RAK DAO offers various crypto licenses, allowing the wrapper to engage in specific regulated activities if needed.
Jurisdiction: RAK (UAE).
Now, when we understand the concept of DAO legal wrappers, their main types, available structuring opportunities and frameworks, let’s discuss several major considerations for DAO legal structuring and legal wrapper design.
Central to any DAO legal structuring, governance presents both a major challenge and a matter of critical importance: properly integrating the traditional corporate governance of the legal wrapper with the DAO’s on-chain voting procedures is essential for effective management and compliance.
The most important element of governance design is the legal wrapper’s recognition of DAO resolutions and token holders’ on-chain voting. This setup serves as a cornerstone for proper governance and control mechanisms within the legal wrapper. Without such integration, aligning the DAO’s on-chain governance with the wrapper’s corporate management procedures would be close to impossible.
When we design legal wrappers, our goal is to achieve a balance where the management of the legal wrapper has enough authority and discretion to effectively manage its operations. At the same time, this management must remain subordinate to the DAO, with the DAO consent being necessary for dealing with material and significant matters. This ensures that the DAO retains ultimate control, preserving its decentralized decision-making process while allowing the legal wrapper to function effectively within existing legal and regulatory frameworks.
A well-designed system of checks and balances ensures that the directors and managers of the legal wrapper do not usurp power or act in bad faith, and if they do, they will face consequences, and any damages to the DAO will be prevented.
Designing a system of checks and balances can be challenging, especially when integrating them with DAO governance. Depending on the circumstances, these mechanisms could include basic recognition of the DAO’s will, procedures for appointing and removing management, fiduciary duties aligned with the organization’s purposes, a list of reserved matters requiring the DAO’s consent, a list of excluded activities, emergency procedures, and more.
Centralization is always one of the primary concerns when structuring a DAO, not only because it aligns with the 'decentralized ethos' of Web3 organizations, but also because sufficient decentralization is often crucial from a compliance standpoint and is required to achieve the project’s strategic regulatory objectives.
Depending on how the wrapper is structured, it could either create a point of centralization or facilitate decentralization. For example, a point of centralization could emerge when the initial founders of the project assume majority of board seats within the legal wrapper, which is not adequately subordinated to the DAO vote. This results in a closely connected (centralized) group of people gaining control over the wrapper and its assets.
Balancing decentralization with the legal wrapper’s corporate governance and applicable legal requirements is essential. While the wrapper provides necessary protections and recognition, it’s important to avoid excessive centralization that could undermine the DAO’s governance, regulatory strategy, or put its property at risk.
The formal procedure for establishing a DAO legal wrapper would depend on the type of the legal wrapper chosen and its jurisdiction. It may further differ for those DAOs which already exist and are operating, and for those DAOs which haven't yet come into existence or are only being formed.
Nonetheless, generally, the procedure would look as follows:
Discussion of the initiative within the DAO. May include co-hosted AMAs and community events, forum or discord discussions, etc., which allow to map the DAO interest
If the DAO shows interest, DAObox puts up a proposal, which is then put to vote (on Snapshot or otherwise)
Once proposal passes, the DAO allocates the approved formation budget to DAObox
Preparation phase (wrapper design, governance and procedures)
Formation phase (incorporation, state registrar)
Post-formation phase (completing formation, appointing management)
DAObox's mission is to equip decentralized organizations and Web3 communities with the comprehensive tools and services that resolve their major legal, operational, and governance pains. Every service we provide is designed to solve specific challenges DAOs face. Our ultimate aim is to enable DAOs to focus on what they do best: building, scaling, and innovating, while DAObox provides comprehensive operational support, strategic guidance, and specialized advice to help them navigate complex regulatory landscapes with confidence.
Our services are designed specifically to resolve the regulatory uncertainties, operational inefficiencies, and compliance risks that hinder your innovation and growth.
By engaging DAObox, the DAO gains access to:
Top-tier DAO wrapper structures globally
Transparent, fixed, and all-inclusive fees
In-depth cross-border intelligence
All major wrapper forms and jurisdictions
Bespoke, turn-key solutions
Co-hosted AMAs and community events
Learn more about DAObox, our unique service offerings, and how we resolve major pains and challenges for the DAOs:
Navigating the complex landscape of DAO legal wrappers requires a thorough understanding of various legal structures, jurisdictional differences, and practical considerations. By carefully selecting and designing a legal wrapper, DAOs can achieve operational efficiency, legal compliance, and enhanced protection for their members.
If you’re considering establishing a DAO or hiring professional manager, or looking to optimize your existing structure, reach out to DAObox for a free consultation with our experts to explore the best options for your DAO’s specific needs and objectives.
