DAO Entity Selection and its Impact on Employment

Ken O'Friel
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June 29, 2022

A Response to Part 2 of a16z’s; A Legal Framework for DAOs

The recent release of Part 2 of a16z’s Legal Framework for DAOs, focussing specifically on the features of different legal entity structures, has many in our community asking; “What impact do legal structures have on employment in Web3." 

The short answer is that, with a comprehensive Web3 Employment Partner (WEP), like WorkDAO, DAOs and Web3 companies can choose whichever legal structure they like. Each structure has its merits and limitations, and we believe organizations need to be free to select that which best meets their needs. WorkDAO is the employment layer for Web3. We provide the infrastructure and expertise to reduce the burden of complex labor regulations on organizations, enabling them to grow, scale and innovate as they see fit. Our focus centers around three fundamental pillars of employment for Web3:

  1. Social: Create a new culture and system for employment and labor in a Web3 environment.

  1. Legal: Provide inter-operation with all legal and regulatory frameworks related to labor, such that DAOs and Web3 companies can freely experiment with legal structures focused on better tax, liability, or governance. 

  1. Logistics: Deliver services for employment logistics including token payroll, token taxes, HR, labor compliance, filing forms, and other statutory requirements.

Summarizing Part 2 of a Legal Framework for DAOs

a16z’s response reflects on the nature of various corporate structures and the impact these have on decentralization, limitation of liability, anonymity, tax (at the entity level), and much more. Here’s the link to it.

The article is primarily targeted at US-based organizations (or those with a significant US presence). Two key takeaways to highlight are:

1) Which structure is best suited to my DAO?

It depends. The type of entity that best suits your DAO is nuanced and varied depending on your needs, according to a16z. For example:

  • Unincorporated Nonprofit Association (UNA): Best suited to network and protocol DAOs or noninvestment and non-LCA DAOs with significant U.S. ties including social DAOs and collector DAOs

  • Foreign Foundation: Best suited to network and protocol DAOs and non-investment and non-LCA DAOs 

  • Entity-less: Best suited to Layer 1 blockchain networks without token-based governance and pure cryptocurrencies with no associated network or protocol.

  • Limited Cooperative Association (LCA): Best suited to cooperatives, collectives, and worker-based initiatives

  • Limited Liability Company (LLC): Best suited to Investment DAOs, collector DAOs, or social DAOs

2) There is no “perfect” legal structure for a DAO and the barrier to international regulatory compliance is high - DAOs must rise to the challenge

The a16z article states “At present, Web3 is expanding towards widespread adoption and reliable compliant entity structures in the face of regulatory uncertainty are essential to support that expansion. 

It is imperative that DAOs and decentralized organizations put regulatory compliance at the heart of their operations. Regulatory scrutiny within Web3 has increased dramatically over the last year and it will only grow. For DAOs to sustainably grow, they will need to comply with laws, especially around employment and taxes. Case in point:

Labor, employment, and taxation laws are among the oldest and most embedded regulations. And, governments care A LOT about them. For a DAO to legally and compliantly employ contributors, they would need to (at minimum) have an established legal presence in each of the local jurisdictions of their contributors. 

Web3 is a global movement, made of individuals from every corner of this planet. To effectively and compliantly meet the needs of the ecosystem, an employment solution must be able to provide legal employment services, globally. Not only this, it must ensure DAOs and Web3 organizations can navigate the complexities of international token payroll, taxation, and employee benefits.

The impact of DAO legal structures on compliant employment

Given the scope of the a16z article (primarily US-based organizations), it is justifiable that the impact of each structure on global employment isn’t prioritized. But, looking at the intricacies of the U.S. alone, it is clear that each structure has a significant impact on how a DAO would need to proceed to provide legal employment. Take an entity-less DAO for example, their lack of legal presence means they are unable to enter into employment contracts with their contributors nor protect them from liability problems. This is a huge concern. 

A recent putative class action lawsuit in the Southern District of California is testing the legal argument that bZk (a DeFi protocol operating as an entity-less DAO) can be deemed a general partnership. If successful, this could set the precedent that individual members of entity-less DAOs may, in certain cases, be jointly and severally liable for damages.

That’s only one example. Extrapolate those complexities for all of the structures outlined in the a16z publication and across the globe. It becomes a huge, complex, and varied problem to solve. To delve into that nuance would require an article twice as long as the one being responded to here.

But, the solution is simple. Utilize a Web3 employment partner (WEP), like WorkDAO, that has built a globally compliant infrastructure to support legal employment for your DAO and contributors. Regardless of your legal structure, a comprehensive WEP will have an established global employment network through which you can employ, provide token payroll, manage token-specific income tax, provide employment benefits and people operations support, and more. This removes the need for DAOs to establish their own legal presence in each of their contributor's domiciles to support compliant employment. It also reduces the cost, time, and pain of understanding the complexities of international and jurisdictional regulations.

If you’d like to speak more about legal and compliant employment for DAOs I’d be interested in talking, ken@theworkdao.com