The life of a web3 entrepreneur and lawyer
Potential client (PC): I want to have you create a DAO for my new startup.
Me: Why are you thinking of a decentralized autonomous organization (DAO)?
PC: It’s the latest thing. I want to walk my talk and be a leader in the web3 space.
Me: That’s cool. Tell me more about your plans.
PC: Shares facts and other details.
Me: OK. I get it. You reside in Florida, will be doing business around the world, and want to create your DAO in California?
PC: That’s right.
Me: Are you aware that if you move forward as planned, and something bad happens in your DAO, the court will probably determine that you’re doing business as a general partnership and allow a judgment to be entered against you for liabilities of the DAO?
Me: Are you aware that if we go forward with your plans, in all likelihood, your personal assets, things like your bank account and investments, may very well be exposed to the collection efforts of judgment collectors because of the business liabilities of your DAO?
PC: No. I thought I would be protected because I’m doing business as a California DAO.
Me: Did you know as of this date, California doesn’t recognize a DAO as a legal entity?
PC: No, I thought everyone was using them.
Me: Who told you that?
PC: I heard about this on a Twitter Space. The person hosting the space sounded like he knew what he was talking about.
Me: Well, he’s 100% wrong. Too many people confuse a 15 minute Google or ChatGPT search with sound and experienced legal advice.
PC: What would you suggest?
Me: Based upon what you told me, I would use a traditional corporation or limited liability company to start your new venture. They are recognized under the laws of California and Florida. Statutory and case law is well established giving everyone a clear idea of what you can and can’t do. Investors and other venture capitalists will be more comfortable doing business with a well recognized legal entity instead of a speculative and untested new type of web3 entity.
PC: OK, that sounds like a good idea.
Me: Depending on where you set up your corporation or limited liability company, you will be filing state taxes (in California) and federal taxes. That’s OK because experienced accountants know how to handle corporate and limited liability company tax returns. They also know how to advise you to make smart business decisions to minimize taxes and maximize profits. Adding certain corporate employee retirement plans allow for additional income deferment and tax reduction strategies. That’s not the case with the new DAOs. There’s still a lot of speculation on how to treat DAOs in most states.
PC: That’s good to know. I didn’t think about that.
Me: Yes, using a traditional business entity takes the speculation and guesswork out of how you can safely do business.
PC: That will allow my team and me to focus on rolling out our new product instead of the possibility of making new law with our DAO.
Me: Exactly. Now, if you do want to create and use a DAO to build web3 credibility and to allow your community to be involved and make certain decisions, what you can do is wrap a new DAO with your limited liability company. By this I mean, either your original limited liability company, or a brand new sub-limited liability company would be the entity to create and manage the DAO that you desire. When done correctly, all DAO liabilities will fall back to the limited liability company and not you personally.
PC: That’s brilliant.
Me: Depending on the business decisions one or more of the limited liabilities and the DAO make, using these additional entities with the advice of an experienced accountant may result in you being able to reduce, defer and even eliminate certain income and related tax liabilities. There are a lot of moving pieces that when used correctly, can help you manage and run an efficient and profitable business.
PC: That works for me. We also want to do one or two NFT drops each over the next 5 years. Any thoughts about how to do this in the best way?
Me: Of course. Your corporation or limited liability company may want to create a separate limited liability company for each NFT project and drop. The income, expenses and liabilities for each project will remain separate and independent from all your other business ventures. If something bad happens, you can limit your exposure to that single NFT project, drop and limited liability company. The rest of your businesses and your personal assets will not be exposed to liability.
PC: Any other tips?
Me: Protect all the above with proper liability insurance. Also consider adding your legal interest in each of the legal entities and projects into your business succession and estate plans. If something happens to you, you want to make sure that you’ve already given legally binding instructions as to who owns and manages your various businesses and assets.
PC: This is all new to me. I never considered any of that.
Me: No worries. Most people don’t. That’s why I’m here.
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