How to Register and Manage a DAO? A Study on DAO Registration and Governance under Delaware Corporate Law
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How to Register and Manage a DAO? A Study on DAO Registration and Governance under Delaware Corporate Law
The new organizational structure has brought about related governance and jurisdictional issues, while the implementation of Delaware's DLLCA has provided a viable approach for many Web3 companies.
Navigating Web3 tides with focused insightsBy: Athena, Ray
1. Introduction
1.1. Research Background
Delaware's reputation as the primary jurisdiction for corporate entities is well known. In recent years, Delaware has also emerged as a leader in providing cutting-edge alternatives to traditional corporate forms. The Delaware Limited Liability Company Act (6 Del.C. § 18-101 et seq., or "DLLCA") exemplifies this leadership by governing one of the most popular alternative business entities—the Delaware Limited Liability Company ("DLLC"). The DLLC has rapidly become the entity of choice for business owners, advisors, and investors, offering tax advantages (and in some cases, business benefits) over traditional corporations.
A DLLC can engage in virtually any lawful business activity, including manufacturing, services, holding and developing real estate, managing intangible property (such as securities and other investments), and serving as a special purpose vehicle in financing transactions. The key advantages of a DLLC include avoidance of double taxation, unparalleled contractual flexibility, and of course, limited liability. A DLLC can be structured in almost any way that best suits the parties’ business needs. This flexibility makes the DLLC superior to traditional corporations and, in many cases, preferable to other business forms such as limited partnerships or general partnerships.
At the same time, new organizational structures like DAOs (decentralized autonomous organizations) are emerging—structures that allow decentralized decision-making through blockchain and token-based voting mechanisms. While traditional industrial enterprises rely on the separation of ownership and management, DAOs offer a completely different template for organizational participation, merging ownership and control—driven by smart contracts, fluid membership, and transparent transaction channels.
These novel organizational forms bring associated governance and jurisdictional challenges, and the implementation of Delaware’s DLLCA offers viable pathways for many Web3 companies.
2. Overview of Delaware Corporate Law
2.1. Delaware’s Limited Liability Company (LLC) Form
Limited Liability
One of the most attractive features of a DLLC is the limited liability afforded to its owners and managers. Under the DLLCA, the owners of a DLLC are generally referred to as “members,” and those designated to manage the entity’s business and affairs are called “managers.” Members of a DLLC may, but are not required to be, managers of the entity, thereby opening the door for investors or other non-managing individuals or entities to benefit from the DLLC. The DLLCA provides that no member or manager shall be personally liable for any debt, obligation, or liability of the DLLC solely by reason of being a member or manager. Additionally, the DLLCA explicitly authorizes the DLLC to “indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.” This limitation on personal liability and broad indemnification authority is comparable to the protections afforded to shareholders, officers, and directors of Delaware corporations.
Contractual Flexibility
The guiding principle of the DLLCA is to allow the parties to define their business relationship in the limited liability company agreement, only prescribing default rules for matters on which the parties have not agreed. A stated policy of the DLLCA is to maximize the freedom of contract and the enforceability of limited liability company agreements. This important policy allows parties to establish and maintain relationships tailored predictably to their specific business needs. For example, in the LLC agreement, parties may designate different classes of members or managers (each with distinct rights, powers, and duties, including separate voting rights, economic rights, or managerial authority), or even create different classes of LLC interests or assets (each with different rights, powers, and obligations regarding specific property, profits, and losses, or even differing business purposes). In fact, nearly every aspect of the parties’ relationship can be defined by agreement. If a member or manager owes any duty (including fiduciary duties) to the DLLC or another member or manager, the DLLCA permits the LLC agreement to expand, restrict, or eliminate such duties (except for the implied covenant of good faith and fair dealing). This flexibility stems from Delaware’s longstanding policy supporting contractual freedom.
Management Flexibility
The principle of contractual freedom is especially evident in management flexibility—one of the cornerstones of the DLLCA. Parties may choose the management structure that best suits them. Under the DLLCA, members of an LLC may participate in management without jeopardizing their limited liability, appoint others to manage the LLC, or adopt a hybrid approach. The LLC agreement may establish multiple tiers of managers, each with specified rights, powers, and duties. It may also include provisions relating to voting procedures, such as the time, place, and purpose of meetings at which votes are taken, waiver of notice, taking action by written consent without a meeting, quorum requirements, and rules for voting in person or by proxy. Members and managers of a Delaware LLC are generally free to engage in transactions with the LLC. Experienced service providers in Delaware are typically willing to serve as managers or “independent” managers for a DLLC when necessary—for instance, for commercial reasons such as satisfying a DLLC lender’s requirements.
Flexibility in Business Combinations
Beyond flexibility in formation and operation, the DLLCA also provides multiple avenues for restructuring a DLLC. For example, under the DLLCA, a Delaware LLC may merge or consolidate with another Delaware LLC or another “business entity”—including corporations, statutory trusts, common law trusts, associations, and partnerships—regardless of whether the other entity is formed under Delaware law or the laws of another jurisdiction. Delaware offers further flexibility by permitting reorganizations through asset sales, conversions, and transfers. Moreover, the DLLCA even allows a business entity formed under the laws of another jurisdiction to convert into a Delaware LLC—or “domesticate” into Delaware—without terminating operations or requiring dissolution and winding up of the original entity.
Easy Formation
Forming a DLLC is straightforward and low-maintenance. Establishing a DLLC requires only (1) an agreement among one or more members (which need not be in writing); and (2) filing a Certificate of Formation with the Delaware Secretary of State.
A DLLC is deemed formed upon the filing of the Certificate of Formation with the Delaware Secretary of State. While the Certificate need only state the DLLC’s name and the name and address of its registered agent and office in Delaware, it may include any additional matters the members wish to include.
The limited liability company agreement is a private contract among members. It is not a public document. Therefore, under the DLLCA, the identities of members and managers of a Delaware LLC, along with the terms of their relationship, can remain confidential. The DLLCA does not impose any minimum capital investment requirement. Non-U.S. businesses and individuals can generally form and operate a DLLC freely, as the DLLCA does not require members or managers to be natural persons or U.S. citizens or residents. Furthermore, neither the records nor the principal place of business of a DLLC need to be located in Delaware—they can be situated anywhere most convenient for the parties, including jurisdictions outside the United States. Records may also be maintained electronically or in non-written formats.
No Requirement of Delaware Business Activity
Delaware law does not require a DLLC to conduct business activities in Delaware or to maintain any physical offices (other than a registered agent and registered office). With respect to the requirement to appoint a registered agent/registered office in Delaware, numerous service providers in the state offer such services for minimal fees.
Beyond paying a minimal annual fee to Delaware (known as the “franchise tax”), a DLLC has no obligation to pay taxes to the U.S. federal government or the State of Delaware solely because it is organized under Delaware law. Generally, a DLLC may owe Delaware income tax if it conducts business in Delaware or derives income from Delaware sources. Similarly, a DLLC may be subject to U.S. federal income tax if it conducts business in the U.S. or earns income from U.S. sources.
Avoidance of Double Taxation
Under U.S. federal income tax law, the structure of a DLLC can allow it to avoid taxation at the entity level. From a tax perspective, this makes the DLLC a highly attractive alternative, as corporations are typically taxed at the organizational level. Members of a DLLC may expressly agree to this tax treatment in their LLC agreement. Of course, the contractual freedom granted by the DLLCA enables members to agree to alternative tax treatments as desired.
3. Compatibility Analysis Between Delaware Corporate Law and DAOs
3.1. 2017 Amendments to the Delaware General Corporation Law (DGCL)
On July 21, 2017, the Governor of Delaware signed new legislation allowing corporations to use “distributed electronic networks or databases” (i.e., blockchain technology) to maintain corporate records, including stock ledgers. By permitting the use of blockchain technology to record and transmit corporate information, Delaware took a significant step toward modernizing corporate governance.
Use of Blockchain Technology for Corporate Recordkeeping
Amendments to Section 224 of the DGCL address the form in which corporate records may be kept: provided the information can be converted into paper format within a reasonable time, corporations may use blockchain technology to record any corporate record, including stock ledgers. Specifically, the amendment allows records “maintained by or on behalf of the corporation” via blockchain, rather than requiring the corporation to “keep” such records, meaning blockchain can replace the traditional role of corporate officers or agents in maintaining these records.
Regarding stock ledgers, information recorded on the blockchain must include: (i) enabling the corporation to compile a list of shareholders as required under Sections 219 (shareholder meetings) and 220 (inspection of books and records) of the DGCL; (ii) recording information required under Sections 156 (partially paid shares), 159 (pledge transfers), 217 (voting rights of trustees, pledgees, and co-owners), and 218 (voting trusts and other voting agreements); and (iii) recording transfers under Title 6, Subchapter 8.
The amendment further states that records created via blockchain shall be valid, admissible as evidence, and acceptable for all other purposes. In essence, blockchain records will be treated equally with the corporation’s paper records.
Use of Blockchain Technology for Corporate Notices and Shareholder Communications
A core feature of blockchain technology is its ability to securely transmit information among multiple parties. Recognizing this, Delaware amended several provisions of the DGCL to explicitly authorize “electronic transmission” via blockchain technology.
Section 232 of the DGCL was revised to broaden the definition of “electronic transmission” to include: using or participating in one or more electronic networks or databases (including distributed electronic networks or databases) where the records created are capable of being retained, retrieved, and reviewed by the recipient and can be automatically reproduced in paper form.
Additionally, the amendment allows corporations to provide notices via electronic transmission to shareholders holding uncertificated shares, conveying information required under Sections 151(f) (certificated and uncertificated shares; rights and interpretations) and 202(a) (transfer restrictions and ownership limitations).
Delaware’s amendments enable corporations to leverage technological innovation to accelerate and optimize internal recordkeeping and notification procedures. Companies adopting such solutions through digital securities can more easily manage and track shareholder voting, issue notices, and administer share transfers.
3.2. 2019 Amendments to the Delaware Revised Uniform Partnership Act (DRUPA)
Amendments to Sections 15-501 and 15-403 of the DRUPA provide clear statutory authorization for the use of electronic database networks—including distributed ledgers and blockchain—to create or maintain entity records and certain electronic transmissions. These amendments mirror prior revisions to the DLLCA and DRULPA and confirm that general partnerships may utilize this rapidly evolving technology.
3.3. Discussion of the Delaware Limited Liability Company Act (DLLCA) and the Delaware General Corporation Law (DGCL)
Rights of Incorporators
Under DGCL §107, if initial directors are not named in the certificate of incorporation, the incorporator shall manage the corporation’s affairs until the board is elected and may take all necessary and proper actions to perfect the organization, including adopting the original bylaws and electing directors.
Regarding Corporate Bylaws
Under DGCL §109(a), original bylaws may be adopted by the incorporator, the initial directors (if named in the certificate), or the board before any shares are issued. Thereafter, shareholders have the right to adopt, amend, or repeal bylaws. For non-stock corporations, this right belongs to voting members. However, the bylaws may grant the board or governing body the power to adopt, amend, or repeal bylaws. Importantly, even if such power is delegated, shareholders or members retain the ultimate right to adopt, amend, or repeal bylaws.
Under DGCL §141(b), bylaws may contain any provision relating to the business, management, or affairs of the corporation or the rights or powers of shareholders, directors, officers, or employees, provided such provisions do not conflict with law or the certificate of incorporation. Additionally, bylaws may not contain any provision making shareholders liable for attorney’s fees or expenses in internal corporate claims against the corporation or any other party.
Rights of Directors
Under DGCL §141(a), except as otherwise provided in the certificate of incorporation, the business and affairs of every corporation organized under the DGCL shall be managed by or under the direction of a board of directors. If the certificate of incorporation contains any such provision, the powers and duties conferred or imposed upon the board by this section shall be exercised or performed by one or more individuals as specified in the certificate.
Under DGCL §141(f), unless restricted by the bylaws or certificate, any action required or permitted to be taken at a board or committee meeting may be taken without a meeting if all members of the board or committee (as applicable) consent in writing or by electronic transmission. Such consent shall be filed with the minutes of proceedings. If minutes are maintained in paper form, the consent shall be in paper; if maintained electronically, the consent shall be electronic. Any person (whether or not then a director) may direct that a written or electronic consent become effective at a future time (including upon the occurrence of an event) within 60 days after giving instructions, and if the person remains a director and does not revoke the consent before that time, the consent shall be deemed given at that effective time. Any such consent may be revoked prior to its effectiveness.
Electronic Contracts
Under DLLCA §113(a)(1), any act or transaction required or permitted under this chapter or an LLC agreement may be conducted in a record, and electronic transmission shall be equivalent to a written document.
Under DLLCA §113(a)(2), regardless of any requirement or allowance in this chapter or an LLC agreement regarding form of signature, manual, fax, conformed, or electronic signatures are valid. An electronic signature refers to an electronic symbol or process attached to or logically associated with a record and executed by a person intending to execute, authenticate, or adopt the record. In other words, individuals may use electronic signatures to sign documents.
Under DLLCA §113(a)(3), unless otherwise provided in the LLC agreement or agreed between sender and recipient, an electronic transmission is considered delivered when it enters the information processing system designated by the recipient to receive such transmissions, provided it is in a form usable by the system and retrievable by the recipient. In essence, delivery of an electronic transmission depends on whether the recipient has designated a system for receiving such transmissions and whether the transmission has entered that system. This means smart contracts could serve as valid decision-making tools without requiring traditional board or shareholder meetings.
Overall Conclusion
Currently, the relevant provisions of the DLLCA and DGCL do recognize the feasibility of applying blockchain technology to Delaware corporate governance. However, this recognition does not yet extend to explicitly permitting governance via smart contracts.
In comparison, only three U.S. states—Wyoming, Tennessee, and Vermont—currently allow DAOs to be formed as a type of limited liability company. [1] Their respective legislation includes specific provisions addressing smart contract governance—for example, Vermont requires disclosure of voting procedures in the operating agreement for certain matters, while Wyoming mandates that DAOs specify in their charter how members manage the decentralized autonomous organization, including the extent to which algorithmic governance is used. [2] In contrast, the DLLCA and DGCL lack such explicit language.
4. The Corporate Transparency Act (CTA) and Its Conflict with DAOs
The Corporate Transparency Act raises new legal questions regarding its applicability to decentralized autonomous organizations. DAOs represent a relatively new form of business association that, lacking formal legal entity status, traditionally lacks statutory governance and liability protection for participants. As legislation seeks to bring DAOs under traditional entity frameworks to enhance protection, DAOs operating through formal entities will need to comply with the CTA’s disclosure obligations.
4.1. CTA Requirements
Effective January 1, 2024, reporting companies operating in the United States must file a Beneficial Ownership Secure System (BOSS) report with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury, disclosing each beneficial owner’s name, date of birth, address, and a copy of a government-issued photo ID.
A reporting company includes any entity created or registered in the U.S. through a Secretary of State filing—such as corporations, LLCs, limited partnerships, or business trusts. Exemptions apply to heavily regulated entities, including publicly traded companies and their regulated advisors, financial institutions, insurance companies, and nonprofit organizations under IRC Section 501(c)(3). Large operating companies are also exempt—those with a physical U.S. street address, 21 or more full-time employees, and over $5 million in gross revenue or sales reported on their previous year’s tax return. Wholly owned subsidiaries of exempt entities are also excluded.
Companies formed before December 31 must file their BOSS report by December 31, 2024. Companies formed on or after January 1, 2024, have 30 days to file and must report changes within 30 days. Federal, state, local, and tribal law enforcement agencies, as well as financial institutions with customer consent, may access BOSS reports, but the data is not publicly available, including through Freedom of Information Act requests. Beneficial owners include individuals who exercise substantial control over the company or directly or indirectly own 25% or more of the ownership interests.
Each reporting company must identify at least one individual. Refusal to disclose may trigger compliance red flags with FinCEN. Penalties for failure to report or false reporting can be severe.
4.2. How the CTA Applies to and Affects DAOs
The CTA assumes reporting companies are legal entities with beneficial ownership and governance structures that DAOs may lack. Traditional partnership-style DAOs would fall outside the CTA’s scope, but DAOs structured under traditional state forms and recognized as legal entities must consider CTA compliance.
Given the structure of DAOs—particularly the absence of managers, directors, or officers—the CTA’s reporting requirements pose significant challenges. Each member (rather than the DAO as an organization) may need to determine whether they possess substantial control or 25% ownership. DAOs structured as member-managed LLCs under state law would require each member to file a BOSS report.
The CTA prohibits bearer shares and anonymous ownership of reporting companies—directly conflicting with the compelling anonymity often associated with DAOs. FinCEN has advised non-traditional entities that substantial control may be exercised in novel and unconventional ways, suggesting that control tests may apply to flexible governance models like DAOs—though different indicators of control may be more relevant. While FinCEN has not clarified how the CTA applies to DAOs, the statute still applies to DAOs formed under state law.
The CTA does not address certain DAO-specific issues—for example, whether token ownership equates to beneficial ownership under the CTA.
In practice, DAOs without directors or officers will struggle to appoint compliance personnel. Wrapping DAOs into traditional structures already subjects them to reporting and compliance protocols, now expanded to include CTA compliance. Regulating inherently innovative, dynamic, and autonomous organizations like DAOs using traditional parameters may be incompatible with their nature. DAOs subject to CTA compliance will need to monitor evolving CTA guidance closely.
DAOs registered at the state level may find CTA compliance easier—or may lack personnel to track CTA requirements—but tracking remains essential. Wrapped-entity DAOs should establish CTA compliance protocols (including designated contacts) and monitor ongoing compliance. Given that DAOs operate via blockchain and smart contracts, designing them to incorporate CTA disclosure procedures may not be practical. Traditional DAOs operating as common law partnerships face no CTA risk, whereas DAOs established as or through state-registered entities must comply. The inherent characteristics of DAOs and blockchain technology will make CTA compliance challenging.
5. Conclusion
Delaware’s Limited Liability Company Act (DLLCA), with its flexibility and tax advantages, holds a prominent position in corporate law. The DLLC, as an alternative entity, offers benefits such as avoidance of double taxation, contractual flexibility, and limited liability, making it widely applicable and highly adaptable. Delaware has also passed amendments allowing companies to use blockchain technology to record and transmit corporate information, offering more efficient solutions for businesses.
With the advent of the Web3 era, DAOs as a new organizational form are emerging. Delaware’s legal framework provides viable pathways for DAOs. However, regulations like the Corporate Transparency Act (CTA) present new challenges, requiring DAOs to meet disclosure obligations traditionally imposed on conventional entities. Thus, the implication for Web3 corporate governance is clear: while Delaware’s legal framework offers certain support for DAOs, DAOs must remain agile and innovative in responding to new regulations and legal requirements, adapting to an evolving legal landscape while maintaining compliance and sustainable development.
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