First, what is a "legal wrapper"? It is not necessarily an entity. It could be any kind of legal ordering, it could be a charter or constitution among members of an unincorporated association.

Secondly, you have a legal wrapper whether you want one or not. If you don't write one down, the law will apply one to you anyway when there is a dispute, and usually those  "default rules" are the worst (e.g., fiduciary duties & joint/several liability for all DAO participants).

If you have a DAO and don't define it, then:

  • if it has a for-profit purpose the law will say that DAO is a general partnership
  • if it has a not-for-profit purpose it will likely be a not-for-profit unincorporated association.

Given point #2, the answer ALWAYS is: "yes! you need a legal wrapper!" Then YOU can define the rules. Otherwise a court will do so later. There is no comfort or freedom in chaos; it merely cedes greater ex post power to courts and lawyers.

Point #3: you don't always need an entity. The default rules for not-for-profit unincorporated associations in many jurisdictions grant similar limited liability protections as having a corporation.

Even if your DAO is for-profit, if you have a good legal charter you can waive most sources of liability among members of the DAO. And if the DAO enters into contracts with 3rd parties, you can waive most sources of liability in those contracts.

What is the remaining risk delta between an unincorporated DAO and an LLC? Torts. (a wrongful act or an infringement of a right (other than under contract) leading to legal liability.) You can't eliminate your tort liability through contract. If the DAO defrauds someone or manufactures a harmful product, everyone can be liable if it is a general partnership.

But, how many DAOs will be manufacturing or operating products? MakerDAO does, so there could arguably be reason to make it an entity (with each MKR holder as a member) rather than an unincorporated association. But most DAOs don't. They are like investment clubs. Clubs can be informal or established as a legal entity such as a partnership. (SEC)

So, overall, (1) yes, you should have an explicit legal wrapper for every DAO, every time; but (2) whether that means you need a state-chartered business entity should be evaluated case-by-case.

Here is a basic prototype LeXpunK came up with for 'charter' for a DAO with no legal entity. It's not perfect but is meant to get the ball rolling on possibilities:

ltlmaps/ZAP-Tech
ZeroLaw Augmentation Protocol. Contribute to ltlmaps/ZAP-Tech development by creating an account on GitHub.

Bookmark this page, pass it onto your DAO friends, save LeXpunK some basic questions and then if someone is ready to pay a lawyer to help them with their DAO wrapper, he is happy to help! twitter.com/lex_node

Talk to people who have been running and participating in DAOs rather than merely theorizing about them: @pet3rpan_ should be your first stop or, if he does not have time, he can likely refer to you to others who have similar experience.

LeXpunK
LeXpunK is law unchained from expectations — a disruptive new attorney praxis designed to grab lawyers by their neckties and drag them kicking and screaming into the 21st century. If you’re a…

We have been looking for a legal advisor for a long time, and thanks to this tweetstorm we finally found one that matches our culture code. If we get funded by for example the LAO it will be easy, we simply incorporate, if not, we will continue bootstrapping, researching and developing concepts and as soon as we move our DAO to mainnet we will hire LeXpunK to help with our legal wrapper.