So you want to create a DAO! Nouns Builder makes creating a Nouns-style DAO, governed by unique NFTs distributed consistently, transparently, and evenly over time, as simple as ever with just a few clicks and no coding experience required. We believe that Nouns-style DAOs represent the next phase of online and on-chain communities, and we continue to support projects, public goods, and infrastructure to improve and proliferate this model. That includes sharing educational resources on practical and legal consideration when looking to create and operate a DAO using Nouns Builder.
DISCLAIMER: Zora is not your lawyer and the following is not legal or financial advice. We’re sharing the following for educational purposes to help you make the right decisions for your respective DAOs to best protect you and your DAO members. Please consider consulting legal and financial advisors prior to creating or participating in a DAO.
What to consider before creating a Nouns-model DAO
DAOs are an incredible way to cultivate communities, creativity, and collective action. However, there are a few practical and legal issues that all creators should consider before launching a Nouns-model DAO:
Liability - Who is responsible for the actions of the DAO, or when something goes wrong? By default, DAOs are likely to be treated like general partnerships, meaning all members of the DAO may be considered personally liable for all of the actions of the DAO. The good news is this liability exposure can be reduced by applying a legal structure to your DAO - we’ll discuss this in more detail below!
Taxes - Nouns-style DAOs all generate revenues to their treasuries through NFT auction sales. These revenues may be taxable, so it’s important to have a plan! Payments made to contributors and service providers may also require some tax reporting.
Operations - DAOs that want to engage in certain IRL activities like entering into contracts, paying service providers, opening bank accounts, or owning property, may need to adopt or incorporate a traditional legal structure (i.e. “corporate personhood”) to do so.
Decentralization - The D in DAO matters! DAOs should be designed to ensure that decision making power is sufficiently distributed among participants, and that information and governance is easily and equally accessible. If a DAO’s success or failure is too dependent on the efforts of a single party, the sale of the DAO’s governance tokens may be considered to be investment contracts (i.e. securities) under US law. Fortunately, Nouns-style DAOs are well designed to support decentralization through their open, accessible, and consistent NFT distribution model, and via their transparent on-chain governance (which is enhanced even further when using Nouns Builder!).
Other issues that may impact your DAO’s level of decentralization include proposal and quorum requirements, delegation, veto rights, protocol code access, marketing language and behavior, and the designation of managers, sub-DAOs, and/or third parties for the performance of certain DAO functions.
Intellectual Property - When designing the NFTs for your Nouns-model DAO, ensure that you are using original content or that you have the right to use and display your chosen art. Being creator-focused means respecting the rights of other creators!
Contributor Compensation - Without a legal structure, DAOs cannot provide payroll support and benefits the way a typical employer does. This can be a challenge if you intend on having substantial or full-time contributors. This can be addressed either by wrapping your DAO in a legal structure or by using third party DAO payroll service providers.
Does my DAO need a legal structure?
Not necessarily! Legal structures can be helpful in addressing a number of the considerations mentioned above. Specifically, legal structures can:
1) shield DAO participants with limited liability protection
2) provide tax clarity, protection from personal tax liability, and in some cases offer tax benefits
3) give some or all of a DAO corporate personhood, allowing it to enter into contracts, employ people, and engage in other real world activity
However, if your DAO doesn’t present these concerns (for example if it is a DAO solely focused on protocol development that conducts all activity on-chain), a legal structure may not be necessary. In addition, adopting a legal structure for a DAO can potentially centralize authority within that structure, presenting other regulatory risks.
You may also decide that only certain functions of your DAO (e.g. functions that handle the treasury and/or funds movement) need to incorporate a legal structure, and not the DAO as a whole.
It’s therefore important to speak to a legal advisor to determine whether a legal structure is selecting and designing your legal structure.
What legal structure makes sense for my DAO?
It depends! Once you decide to move forward with a legal structure for your DAO, there are a number of options you can choose from. Factors that may determine the right structure for your DAO include:
What the purpose of the DAO is (e.g. social vs. investment vs protocol);
Where DAO operations will take place (e.g. US vs non-US);
Whether your DAO membership will be static or fluid;
Whether your DAO wishes to accommodate anonymous membership;
What DAO functions will be covered by the legal structure, and
Whether the DAO is for-profit or not.
Examples of potential legal structures your DAO can adopt include:
Non-US Foundation (e.g. Cayman)
US C Corporation
US Unincorporated non-profit associations
US Limited Cooperative Associations
For a helpful comparison of the various legal structures for DAOs. please see Paradigm’s DAO Legal Entity Matrix. For a more detailed discussion of DAO legal structures, please see A16z’s Legal Framework for DAOs series (Part 1 and Part 2).
When should my DAO’s entity structure be formed?
If you believe a legal entity is appropriate for your DAO, it’s best to establish the entity before the DAO is deployed and starts generating revenues (this will make governance and dealing with taxes easier). Don’t worry though, you can always establish your entity after DAO formation using your DAO’s governance mechanisms!
We hope to expand on these educational materials, and to build out more tools and workflows to help creators structure and govern their DAO, so please check back here if you have questions! We cannot, however, advise you on your DAO’s legal structure, so please talk to a lawyer to determine whether and what legal structure works for your DAO.