Want to enjoy the benefits of a decentralized system with the protections of a legal system? Then DAO LLCs are the answer! These companies are the new face of modern financial systems and have become the hottest topic of debate amongst entrepreneurs.
While some aspiring entrepreneurs prefer the autonomy of a DAO, many individuals still want to operate within legal boundaries when starting a new company. Neither of these parties is wrong, but this is a much deeper and complex topic than it appears on the surface.
Before diving into the holy union of the two, DAO LLCs, let’s start with understanding what a DAO is and how it essentially differentiates from an LLC. With this knowledge, you will be able to understand DAO LLCs more easily and can decide for yourself which path is best for your business.
What is a DAO (Decentralized Organization)
A decentralized autonomous organization is an online community with no central governance. Users run this community or system through trusted code, and anyone from the world can participate without restrictions.
As there is no central governance in a DAO, all the protocols are created and controlled by the users through smart contracts. These contracts are developed in collaboration with the community and are executed automatically upon deployment. These contracts control voting mechanisms, fund distributions, protocol upgrades, and membership rules.
In DAOs, tokens are used for governance. These governance tokens enable users to vote on new protocols to be implemented in a smart contract, making the system independent and transparent compared to traditional financial systems.
With a boom in the Web3 world, people are increasingly interested in transparent systems that enable them to control their own assets. DAOs also allow global participation without creating boundaries, making them one of the most important financial systems of 2025 and beyond.
What is an LLC (Limited Liability Company)
A limited liability company is a business that combines the proprietorship/partnership with the legal protections of a corporation. It is one of the best ways to start a small business under government rules and protection.
As an LLC is registered with the government, it becomes a separate entity from its owners, which allows it to operate independently, such as owning property or entering into contracts on its own. With an LLC, the assets of the owners are protected if the business ever encounters trouble, such as liquidation. The company is also responsible for its actions, and the owners can’t be held responsible for its actions.
As LLCs are easier to set up with minimal paperwork and allow tax benefits, they are usually the first choice for small businesses and first-time entrepreneurs.
DAO vs. LLC: Key Differences
While both DAOs and LLCs serve the same purpose, combining people and communities around a shared goal, they employ different operational methods, as one falls under direct government regulation. At the same time, the other is not subject to centralized systems.
1. Governance
In DAOs, the whole governance or power lies with the members or governance token holders. These tokens can grant one vote per token or be used to represent the amount of power a token holder has. The voting through these tokens takes place on-chain, and token holders can propose new ideas that can be implemented into smart contracts upon approval from the users. In other words, a shared democracy that is entirely run by code.
However, in an LLC, all owners make decisions together. This eliminates other members, like employees, from holding any decision-making power. Every decision made is private and is recorded for future reference. Unlike smart contracts, new decisions are implemented through proper legal channels and the guidance of lawyers within an LLC.
2. Member Rights and Records
In a DAO, all records and proposals are publicly accessible and can be viewed by users at any time. Any token holder can vote on proposals, giving them governance right. However, these token-holders hold no legal rights unless the DAO has a legal wrapper. In the event of a problem, token holders may be held responsible for the actions of a DAO.
In an LLC, members can officially demand records for review, check tax statements, tax returns, and meeting minutes. Members can also sue the company and take legal action if they discover any wrongdoing. LLCs have specific agreements to grant voting rights on new proposals. These can be equal rights or, depending on ownership percentage.
3. Difference in Operations
DAO has an automated and transparent on-chain operation. Every vote and action is visible to users, and they can audit all smart contracts without needing to request higher authorities. DAOs operate as a true decentralized system should and they adapt by implementing new rules through community-approved proposals.
In LLCs, all operations are done through legal documents and human management. Every decision is made off-chain, in closed quarters, with zero public access. All operations are conducted manually through legal actions initiated by owners or those in power. LLCs require approval from their owners to amend their laws or add adaptability to their current system.
4. Liability Shield & Contracting
DAOs are not legal entities unless they are wrapped as a legal entity. This results in DAO’s inability to own assets, sign contracts with other legal firms, engage with banks, or appear in courts. In the event of a problem, courts can treat DAOs as general partnerships and hold them liable for any resulting losses.
However, in an LLC, the assets of the owners are protected by law, as the LLC is a separate entity from the company. They can contact banks, engage in legal contracts, own assets, or participate in court orders as a company.
5. Formation & Legal Recognition
A DAO is usually launched on a blockchain with the help of smart contracts that execute automatically. Users or participants receive tokens to participate in governance, and no filing is required with legal authorities. This makes DAOs legally vulnerable, and they can be targeted by the government through regulations at any time unless they are incorporated as an LLC.
To form an LLC, you must file with the state by filing articles of organization. Owners use law firms to draft a legal document that outlines their roles and the terms of profit sharing. Once approved, an LLC becomes a legal, separate entity with the ability to own assets and participate in legal proceedings. This grants the LLC the legal authority to interact with banks and courts.
6. Resolution of Disputes
As code is law in DAOs, if the smart contracts do not cover a dispute, there is no resolution for it. There are arbitration protocols, such as Aragon Court, that can be used to resolve conflicts through community voting or a juror system. As courts can’t identify a DAO, it may become impossible for them to reach a resolution in case a conflict ends up in a court of law.
However, LLCs use proper legal channels to resolve disputes, much like a court of law. Members can file lawsuits in state or Federal courts if a problem arises. Some LLCs have written agreements that allow members to use arbitration before resorting to court. As LLCs are legally recognized, courts can easily solve disputes between the members.
7. Funding and Capital Raising
DAOs raise their capital through token launches, pooling assets in a treasury, allowing trading of assets through DeFi platforms to earn interest, selling NFTs, and raising funds through crowdfunding. While these methods are transparent, they lack any legal backing and can be scrutinized by governments.
In an LLC, capital is often raised by owners/members by pooling their assets. They can also attract new investors through formal contracts. As legal entities, LLCs can also borrow from banks or other financial institutes. New startups also use venture capital (VCs) to raise funds. These are all legal methods and allowed by law.
8. Jurisdiction & Compliance Differences
DAOs operate from blockchains and have no physical presence. This makes it impossible to determine which country’s rules apply to a DAO and how they can be enforced in a decentralized system. As DAOs are not recognized by most countries, they fall into a legal gray area.
LLCs are recognized by law and offer full compliance through document submission, adherence to tax rules, and timely filing of returns. They have clear legal agreements that a court of law can use in case of a dispute.
9. Taxation Differences
As DAOs are not recognized by most territories, this makes it difficult for them to file taxes, despite their tokens or interests being considered taxable by the IRS and other legal bodies. Any transaction made through tokens is considered income and is liable to taxation. However, it falls to individuals to file their returns, rather than the DOA as a whole.
LLCs are exempt from corporate taxes and use pass-through taxes. This means that each member must file their own return, depending on their share of the profit or loss. However, LLCs can opt to be taxed as corporations. LLCs properly pay income tax and employment tax to both the state and federal governments.
What is a DAO LLC?
A DAO LLC is a DAO wrapped with the liabilities of an LLC. This hybrid structure enables a DAO to maintain its core values, such as governance, while providing legal benefits to its members. By forming an LLC, a DAO can legally own assets, enter into contracts, acquire loans from banks to raise capital, limit liability for its members, and comply with tax and regulatory requirements.
However, this doesn’t take away a DAO’s ability to continue its function through smart contracts that are still proposed and approved by its community.
Where Can a DAO LLC Be Registered?
As of now, only three U.S states allow a DAO to be registered as an LLC. These include.
- Wyoming (since July 2021)
- Tennessee (since April 2022)
- Vermont (via BBLLC)
The following countries also permit a DAO to be legally structured as an LLC.
- Liechtenstein
- Switzerland
- Cayman Islands
- Marshall Islands
With laws evolving and many states offering tax benefits, they are now exploring how to allow DAOs to incorporate themselves as LLCs by following state rules. Two states, Utah and Nevada, are actively working on this proposal and will soon become a new haven for legal DAOs.
Are There Any Benefits of Registering a DAO LLC?
While it may seem contradictory to the basic ethos of a decentralized system, wrapping a DAO with an LLC has many benefits. It not only maintains the core ideology of the DAO but also grants it legal rights that can help enhance its capabilities and provide protection for its users.
- Legal Liability Shield: A DAO LLC can limit the liability of its users, meaning that in the event of a legal proceeding, the users can’t be held responsible. Without it, a DAO is considered a legal partnership by the court of laws.
- Legal Recognition: By registering as an LLC, a DAO gains legitimacy and can now own assets or deal with banks directly. It can now also raise capital via traditional methods, and users get full legal coverage through security and employment regulations.
- Proper Taxation: A DAO LLC can properly file tax returns, making it easier for the users to enter the tax net and enjoy the benefits.
- Flexibility in Operations: While the members of a DAO LLC can participate from anywhere in the world, the LLC provides a legal anchor of a particular state, making the rules clear to them. This means a DAO LLC can continue to operate through smart contracts while being subject to the law.
- Scalability: As DAOs scale globally on a massive scale, an LLC wrapper provides them with legal safeguards in case of conflicts and fraud.
Risks & Limitations of a DAO LLC
While a DAO LLC offers the best of both worlds, a decentralized entity with legal status, it also involves various risk factors and limitations.
- As only a few states permit DAOs to register as LLCs, a federal legal framework does not yet exist, making it challenging for courts to recognize their status.
- As people from across the globe can participate in a DAO, this makes it difficult for a DAO LLC to apply the rules of a jurisdiction to all its members.
- There are no uniform standards, and each state has its own rules for a DAO to register as an LLC.
- Many brokers and banks are still unwilling to work with DAO LLCs.
- Token rewards and cross-border payments can create tax complexity.
To Wrap Things Up
DAOs offer token-based governance as compared to member-led governance in an LLC. DAOs are often unrecognized by governments, while LLCs enjoy full legal status. A DAO has no liability shield, while an LLC provides a full shield to its members.
As the advantages offered by an LLC can significantly alter the outlook of a DAO and enable its members to enter a proper tax net, many DAOs are looking to incorporate themselves as LLCs. This also allows a DAO to own assets, interact with banks, and represent itself in the court of law.
If a business has clear legal needs, it should always opt for an LLC. However, a project that needs to be community-based with decentralization at its heart should go for a DAO. In the event of legal requirements, a DAO can wrap itself in an LLC, but this comes with its own set of risks and limitations.
Frequently Asked Questions
Q: What is the difference between a DAO and an LLC?
A DAO has no centralized governance and works via code through automated smart contracts. An LLC operates under legal agreements, and the members hold all the governing power.
Q: Can a DAO legally operate without being registered as an LLC?
Yes, in a few states and with a lot of risks and limitations. However, most DAOs can’t operate legally without an LLC wrapper.
Q: Is a DAO LLC recognized in all U.S. states?
No, all three states recognize DAO LLCs in the U.S. These include Wyoming, Tennessee, and Vermont.
Q: How do taxes work for a DAO LLC compared to a traditional LLC?
LLCs use a pass-through system for taxation, where each member is taxed according to their profit or loss. However, in a DAO LLC, users are taxed on token-based income that can include staking, treasury holding, airdrops, or protocol fees.
Q: Who controls decision-making in a DAO LLC?
By users or governance token holders. They propose a new decision, which is then approved through voting. Once approved, it is implemented automatically through smart contracts.
Q: What happens if disputes arise in a DAO LLC?
As DAO LLCs are recognized by law, the dispute can be taken to a court of law, or arbitrators can be used before any legal proceedings to solve the dispute.
