The MIDAO LLC: a web3 native corporate wrapper

DAO wrappers come in various shapes and sizes. In some jurisdictions, they are innovative & imaginative adaptations of various forms of pre-existing corporate structure - Swiss, Panamanian and Cayman structures are examples of these. The Marshall Islands DAO LLC (MIDAO) is, however, something else - a corporate entity developed with the specific purpose of serving as a legal wrapper for DAOs.The result is a legal structure that straddles the on and offchain world, one that lets DAOs exist in both code and corporate form without losing their decentralized DNA.

Sailors, navigators, DAO-shapers: the Marshall Islands and the DAO LLC

Descriptions of the Marshall Islands typically begin by pointing out their modern role as a centre for ship registration, offshore finance, and, less happily, as a former location for US nuclear testing. This is a pity.  A small Pacific state,  the Marshall Islands is composed of 82,000 people, 29 inhabited islands and atolls, and a vast expanse of ocean. Over 98% of its national territory is water; this is an island nation, a place tied to the sea and, like so many island nations, a place where geographic isolation has encouraged innovation. The skill of Marshallese sailors is legendary. Settled by successive waves of South-East Asian sailors, life on these far flung islands required adaptation, resilience, and innovation. Most notable among these perhaps is the Marshallese stick chart - a unique form of pre-modern sailing tool enabling sailors chart their journeys on the basis of wave movements. Alongside technical innovations are those of governance; lacking any central government before the colonial era, political power was local and variable between the islands.

This then is the heritage of the Marshall Islands - a stateless zone of navigators and explorers seeking their fortune on the open ocean. The perfect place, in short, to host the borderless and international world of DAOs. 

In 2022, Marshall Islands passed the Decentralized Autonomous Organization Act (aka the DAO Act) letting DAOs register as LLCs. MIDAOs have a few core attributes of interest to web3 project leaders. Like other DAO wrapper types, it provides legal personality to the DAO, and limited liability for actions of the DAO. 

Core features:

• A full wrapper: Token holders can be members of the DAO LLC, meaning they are fully ‘wrapped’ by the legal entity. 
• Fully on-chain: All documents and decisions pertaining to the DAO can be placed on-chain, facilitating transparency
• Algorithmic decision making: The law explicitly acknowledges blockchain-based decision-making. MIDAOs thus offer DAOs the chance to have a fully smart-contract based internal governance process. 
• Directorless: if the DAO does not want to have human managers or directors, it does not need to have them

Recap: Why DAO wrappers are important

DAO wrappers are useful for three reasons:

1. Legal personality: Limitless, borderless, on-chain, DAOs represent a new organisational form, an innovative approach to various questions of coordination, and a brave new world of innovation - but try telling that to your landlord.  An on-chain, unwrapped or even ‘naked’ DAO may have a certain ideological purity - but it may also find itself unable to interact with the real word. To create valid contracts in the offchain economy, someone or something has to exist in the eyes of the law. What is needed is legal personality - legal recognition that the DAO exists.

2. Limiting Liability: This is an important one for DAO tokenholders. Where DAOs do not have legal wrappers or other forms of legal structure to represent them, they will typically be seen by traditional legal systems as some kind of general partnership or unincorporated association. This is fine, so far as it goes - but if something goes wrong, it can create serious problems By viewing them as general partners, courts may find DAO token holders jointly and severally liable for whatever the DAO may have done incorrectly, imposing huge financial losses on individual token holders. To protect token holders, DAOs need to find ways of limiting liability.

3. Decentralised governance & control: When structured in the correct way, DAO wrappers give real-world legal effect to web3 decentralisation. This has important regulatory ramifications. It also reduces the ability of project leads or particular contributors from manipulating the DAO to their own ends.

Attributes of the Marshall Islands DAO LLC

Since its launch in 2022, MIDAO LLCs have become one of the leading ways to legally structure a DAO. Of particular note is the sheer flexibility of a MIDAO entity. It can be charitable or non-charitable, have greater or lesser extents of algorithmic governance, and keep records on-chain for transparency or off-chain for privacy. It can keep, or entirely dispense with, human managers, and it encompasses great variety in terms of how people can write up the DAO or constitution. Below, we consider some of the main attributes of MIDAO LLCs:

Charitable vs non-charitable

Project leads setting up MIDAO LLCs can choose whether they want the entity to be set up as a non-profit or for-profit entity. 

Non-profit MIDAO LLCs: These are useful for a range of non-profit purposes, like maintaining a DAO or protocol, or issuing grants.

• Purposes: The non-profit purpose must be stated on the outset, and on the incorporation documents
• No distributions: No part of the income or profit of the DAO LLC is distributable to the members, officers, or directors of the entity
• Ownerless: non-profit MIDAO LLCs can be ownerless
• Tax: non-profit DAO LLCs are not subject to any taxes in the Marshall Islands

For profit MIDAO LLCs: Useful for projects that need to generate revenue, hold a treasury, distribute value to tokenholders.

• Fees and value: for-profit MIDAO LLCs can charge fees and distribute value to members and officers
• Tax: subject to RMI tax of 3%

Automated governance: algorithmic & human managed DAOs

MIDAO entities can act very similarly to onshore LLCs, with human managers and off-chain governance. They can also opt to use smart contracts for many of the internal governance processes of the entity. This enables DAO planners to have a high degree of algorithmic management for their project, reducing centralisation on individual humans. 

Away from the Marshall Islands, many DAOs wrappers rely on human officers for management, oversight, and decision-making pertaining either to the DAO itself, or to the wrapper entity. Sometimes this is a matter of legal obligation, as with the directors of a Cayman foundation; other times this is simply because certain personnel have access to relevant skills. 

MIDAO offers DAO planners the opportunity to choose the extent of their reliance on human operators. We outline this below:

Algorithmic DAOs

MIDAOs can be fully run by smart contracts. Unlike Cayman or Panama foundations, no directors, managers, or councillors are required to operate the structure; this is a great advantage for projects concerned about decentralization, and by the need to avoid the perceived weaknesses and biases of human control. 

• Governance can be conducted entire onchain
• As expressed in the Operating Agreement, the DAO can have smart contracts run all membership and governance decisions
• Smart contracts can run everything: treasury spending, protocol parameters, governance upgrades
• The LLC formation docs can reference the contract address(es) that govern the DAO
• On-chain proposals and executions are the corporate actions — no human rubber stamp required.

Human-managed DAOs

MIDAO entities can be like ‘standard’ LLC structures in other jurisdictions, with off-chain governance processes and human managers. In many cases, human individuals have access to some sort of skills or insight needed to help the activities of the DAO. Recognising this, MIDAO structures also allow provide DAO creators with scope for human officers:

• You can have managers, directors, or officers (yes, even a CEO) if your DAO needs IRL execution - this is especially useful for hiring, partnerships, or bank onboarding
• Smart contracts can be advisory or partial-execution tools.

Hybrid and evolutionary? The choice of algorithmic or human governance is not an either/or. MIDAO entities can opt for either for different elements of their operations. They can also evolve with time; many MIDAO DAOs may begin with fairly ‘traditional’ human governance, and then transition into a more algorithmic mode over time.

Most DAOs will land somewhere in the middle: on-chain for governance legitimacy, off-chain for anything that needs a human face or a pen.

Membership & roles: highly flexible 

The MIDAO LLC is notable for the particular flexibility it offers in terms of arranging the roles and responsibilities of its members, managers, and officers. Given the sheer variety of DAO and protocol business models, this can be very useful.

• Members: those who own the DAO LLC and therefore have rights within the Operating Agreement
  • Who are they: The nature of memberships & the rights it confers are defined by the operating agreement. Members are usually token holders, but can also be or specific individuals/entities. 
  • Minimum: Whilst it would certainly make for a peculiar DAO, MIDAO LLCs can be set up with as little as 1 member
  • Maximum: Uncapped. Should it be necessary or desirable for the project, a MIDAO LLC can have millions of members
• Managers (optional):  These are individuals and entities appointed to handle operations. Members can be a single person, a multisig wallet, or even another DAO. 
• Officers (optional): Officers, their titles, and their responsibilities are entirely flexible. 
• Smart Contracts: Not people, but they can be named in the documents as governance engines.

This flexibility around members, officers, and managers stands in contrast to the dominant form of DAO wrappers - foundations. Typically set up in the Cayman Islands, Panama, and Switzerland, projects who opt to utilise foundation structures will need specific officers like directors, councillors, and supervisors to fulfill local foundation requirements.

The constitution: also highly flexible

The constitution of a MIDAO is expressed through the Operating Agreement. This document outlines everything needed to operate the DAO. It outlines the purpose of the entity, how it shall be governed, the roles and responsibilities of officers, and the rights of members. It should include details on such topics as:

• Membership: 
  • How members join or leave
  • How members are tracked
• Finance:
  • How profits are distributed
  • Details treasury management and who can sign off on transactions.
• Governance 
  • Governance rules rules (on-chain, off-chain, hybrid)
  • Governance decisionmaking: proposal processes, voting thresholds, and quorum rules
• Dispute resolution: 
  • disputes (courts, arbitration, or something spicier).
• Officers and roles: the nature and scope of any officer or managerial roles. 

Pros & Cons of the MIDAO LLC

The pros….

The advantages of MIDAO LLC depend upon the nature of your project. But in broad terms, they are useful because: 

1. DAO-native law: the MIDAO law is purpose-built, not shoehorned from generic LLC statutes. This provides local regulatory clarity. 
2. Limited liability: Like other DAO wrappers, the MIDAO shields the DAO from personal financial exposure. Importantly, and as mentioned above, it does this for all DAO members - not just the real-world actions of the DAO as carried out by a foundation.
3. On-chain recognition: You can legally tie governance to specific smart contracts.
4. Governance flexibility: Fully on-chain, fully off-chain, or any blend.
5. Offshore tax benefits: Depending on whether the DAO is not for profit, MIDAO LLCs can enjoy low of no tax in the Marshall Islands. 
6. Non-profit or for-profit — Suits both mission-driven DAOs and commercial protocols.
7. Global-friendly — No need for members to be RMI citizens or residents.

…. And the cons of the MIDAO LLC

Not everything is vibes and yield:

1. Offshore jurisdiction stigma: Some banks and prospective business partners will auto-flag “Marshall Islands” as high-risk.
2. KYC kills full anonymity: DAO members holding over 25% of the DAO LLC must be identified. For some projects, this may not be preferred
3. Unproven case law: It’s new. No big legal battles yet to prove how it holds up.
4. Global regulatory reach: US/EU regulators can still assert jurisdiction if you operate in their markets.
5. Code vs. contract tension: When smart contracts conflict with legal docs, expect messy interpretation.
6. Professional depth: Compared to jurisdictions like Switzerland or the Cayman Islands, the Marshall Islands has a small professional services sector. This may impact service.

MIDAO LLC vs other DAO wrapper structures

Wyoming DUNA vs MIDAO LLC

• What it is: a ‘Decentralized Unincorporated Nonprofit Association’. This is a nonprofit association wrapper, lighter than an LLC, recognized under Wyoming law.
  • Pros: No corporate tax; low admin; nonprofit optics.
  • Cons: It must be non-profit; creates a US regulatory nexus for the DAO; has a minimum of 100 members
• Comparison: Not all DAOs will want to be associated with the USA, and many if not most DAOs do not start with 100 members. 

Wyoming DAO LLC vs MIDAO LLC

• What it is: LLC with DAO provisions under Wyoming law.
  • Pros: US jurisdiction = easier US banking & partnerships; some DAO recognition.
  • Cons: Utilizing a Wyoming DAO LLC reates a US tax & regulatory nexus. In addition, there are various peculiarities to the Wyoming law - DAOs LLC must dissolve if they do not ‘approve any proposals or take any actions’ in a one year period. Wyoming DAO LLCs are also expected to publish their smart contract keys; this is an issue for early stage projects, who may not have finished development
• Comparison: Not all DAOs will want to be associated with the USA, and Wyoming has certain inflexible / unrealistic DAO LLC provisions

Cayman Foundation vs MIDAO LLC

• What it is: A foundation company, often structured so as to have no shareholders.
  • Pros: Highly respected offshore vehicle; great for treasury & IP holding; strong legal precedent.
  • Cons: Not DAO-native; governance still mostly off-chain in bylaws; more expensive to set up and maintain.
• Comparison: The Cayman foundation is a leading tool for the wrapping of DAOs and protocols - the Cadillac, or perhaps the Bentley, of web3 legal wrappers. However, it requires corporate officers and leaves the DAO itself unwrapped. For projects who want neither (and cheaper) the MIDAO LLC is a good option.

Main use cases for the MIDAO LLC

• DeFi Protocol Governance: On-chain votes become binding corporate actions.
• Cross-Border Contributor Coordination: Global team, no single national HQ.
• DAO Treasury Management: Bank accounts without making every member a signatory.
• Public Goods Funding: Non-profit DAO LLC for grants and open-source projects.
• Token-Gated Clubs & Communities: NFT or token-based membership with legal status.
• Hybrid Ops DAOs: On-chain governance with off-chain management for IRL interactions.

How to launch a MIDAO LLC

1. Step 1: define your DAO

Define your DAO: Anyone thinking of setting up a MIDAO LLC should consider what it is they are seeking to build, and what they need to do. The purposes of the DAO poses some important early questions, such as: 

• Profit status: Do you want this to be a for-profit or not for profit entity?
• Governance: What level of algorithmic governance do you want? How would a high degree of algorithmic governance affect the growth of the project, and your wider legal position
• Personnel: Do you want there to be any managing members, officers, a board?
• Members: Who are the members, and what rights do you want them to hold?
• What is it for? The biggest question of all.... what is the DAO actually for? The answer to this question impacts on all of the above, and more.

Consider your wider legal and tax strategy: Irrespective of the jurisdictions they might base themselves in, no DAO is an island. The DAO will inevitably need to consider the international  legal and tax implications of what it plans to do, for the activities of a MIDAO LLC will almost certainly involve operations and interactions in jurisdictions outside the Marshall islands. Projects developing a US-oriented token from a MIDAO entity, for instance, will still need to consider their US regulatory position, irrespective of the fact their entity isn't based there. Build your strategy in in from the beginning by consulting with a good web3 lawyer - this saves nasty surprises later on.

MIDAO LLCs are often used in conjunction with separate entities and other jurisdictions. Many web3 projects may show a distinction between a legal wrapper for their DAO or protocol governance, a separate token issuance entity, and one or more LabCo, DevCo, or OpCos that undertake the work of developing software and conducting revenue-raising activities/

A typical structure may use a MIDAO alongside a Delaware C-Corp , or a BVI entity. Although often juxtaposed with Cayman foundations, MIDAOs can be found working alongside foundations for certain use cases.

2. Prepare documentation

Having thought through what it is building and how this can reflect this in the operation for the DAO, a project must now prepare the relevant documents

1. Certificate of Formation: Filed with the RMI Registrar, stating you’re a DAO LLC and optionally listing smart contract addresses
2. Operating Agreement: The crore document outlining the constitution of the DAO, the rights had by internal parties, and how it is to be governed.  Internal, but critical. Can be made public for transparency cred.
3. Registered Agent Agreement: Every DAO LLC needs an RMI-based agent. Tjis can be provided through the DAO SPV platform.
4. Beneficial Ownership Information: The RMI has BOI rules; certain humans/entities behind the DAO will be disclosed.

3. Maintain ongoing Compliance Obligations

• Maintain a registered agent & office in the RMI.
• File annual reports.
• Update Beneficial Ownership Information when membership changes materially (ie, in relation to any members who hold over 25%)
• Keep smart contract references current if they’re part of formation docs.
• Consider using a web3-focused company services platform like DAO SPV to stay on top of your obligations

A final word

The MIDAO LLC isn’t a magic legal forcefield. But it’s one of the first credible, DAO-native corporate forms that doesn’t treat decentralization like a weird hobby.

If your DAO is global, wants explicit legal recognition, is looking for a high degree of algorithmic governance, an wants to fully ‘wrap’ DAO members, the MIDAO LLC is worth consideration.

From planning to formation and beyond, DAO SPV is on hand to help you at every step of the journey.