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Editorial 8 MIN READ

Wyoming's DAO LLC: a new chapter, and what it actually does

SB 38 gave decentralized autonomous organizations a Wyoming entity wrapper, effective July 1

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. What SB 38 actually says
  2. The 2019 foundation
  3. Member-managed versus algorithmically managed
  4. What the statute does not do
  5. Who files one, and when
  6. The loose end worth watching
  7. Sources

n July 1, 2021, Wyoming became the first US state with a statutory entity built for decentralized autonomous organizations. The Wyoming DAO LLC sits inside the existing LLC Act as a new chapter, Wyo. Stat. § 17-31-101 through § 17-31-116, added by Senate File 38 and signed by Governor Mark Gordon on April 21, 2021.

It is a narrow statute doing a narrow thing. It does not legalize anything that was illegal. It does not answer the securities questions. What it does is give a DAO, the on-chain kind with a smart contract and a token, a way to incorporate in a US jurisdiction as an LLC whose operating agreement can, in whole or in part, be a smart contract.

What SB 38 actually says

The statute reads as an amendment to Wyoming's LLC Act, which means a Wyoming DAO LLC is first an LLC, then a DAO. All the usual LLC mechanics apply unless Chapter 31 says otherwise: the registered-agent requirement at Wyo. Stat. § 17-28-101, the annual-report license-tax minimum at § 17-29-209, the charging-order exclusive-remedy rule at § 17-29-503. A DAO LLC that stops paying its $60 annual report is administratively dissolved like any other Wyoming LLC.

What Chapter 31 adds is four moving parts.

First, an election. A Wyoming LLC becomes a DAO LLC by stating, in its Articles of Organization, that it is a DAO. The statute at § 17-31-104(a) requires the articles to include the statement "The rights of members in a decentralized autonomous organization may differ materially from the rights of members in other limited liability companies" and a public identifier of any smart contract directly used to manage, facilitate, or operate the DAO. The name must include "DAO," "LAO," or "DAO LLC" per § 17-31-104(b).

Second, a default management form. § 17-31-109 says a DAO is member-managed unless the articles specify it is algorithmically managed, and algorithmic management is only available where the smart contract can in fact be updated, modified, or upgraded. The statute concedes the obvious: a purely immutable contract cannot be the governance of a going concern, because at some point governance has to happen and humans are the fallback.

Third, a rewritten operating agreement. § 17-31-106 declares that the operating agreement of a DAO may consist of, or incorporate by reference, the underlying smart contracts. This is the load-bearing provision. It is the reason the chapter exists. It lets the token holders' on-chain votes, the treasury multisig, the proposal-and-quorum logic encoded in Solidity, stand as the binding internal governance of a Wyoming legal entity. If the operating agreement and the smart contract conflict, the statute at § 17-31-106(c) sends you to the operating agreement for anything the smart contract cannot perform.

Fourth, a dissolution trigger tied to inactivity. § 17-31-114 provides that a DAO dissolves upon a vote of the members, or when it has failed to approve any proposals or take any actions for a period of one year. The year-of-silence rule has no analog in the ordinary LLC Act. It exists because a DAO without activity is, by construction, something other than what it was chartered to be.

The full text of SB 38 is on the Wyoming Legislature's site, and the codified chapter is now live on the state's statute server.

The 2019 foundation

The DAO LLC is not a standalone experiment. It sits on top of Wyoming's 2019 digital-asset framework, which did the harder legal work.

House Bill 74 (2019), codified at Wyo. Stat. § 34-29-101 through § 34-29-106, classified digital assets into three categories: digital consumer assets, digital securities, and virtual currency. It then located them in the UCC. § 34-29-103 treats digital assets as intangible personal property and, for virtual currency specifically, treats it as money for Article 9 purposes so a secured party can perfect a security interest by control. Before HB 74 the question of where a token lived in commercial law was unsettled; afterward, in Wyoming, it had an address.

Senate File 125 (2019), Wyoming's Special Purpose Depository Institution statute at Wyo. Stat. § 13-12-101 et seq., created a new class of state-chartered bank that holds digital assets, fully reserved, without making loans. Kraken Financial received the first SPDI charter in September 2020. Avanti Financial Group received the second in October 2020. The SPDI is not a DAO structure, but it is the reason Wyoming could credibly argue in 2021 that a DAO LLC would find a banking counterpart in its own jurisdiction.

Chapter 31 presupposes both statutes. A DAO LLC holds, by assumption, digital assets that the state has already defined. It may open a bank account at an institution the state has already chartered to custody those assets. Delaware did not have an answer to either question when SB 38 was drafted, and that is most of the reason SB 38 happened in Wyoming.

Member-managed versus algorithmically managed

The statute's binary between member-managed and algorithmically managed is the choice that will determine how a DAO is actually run.

A member-managed DAO LLC looks, from the statute's perspective, like a conventional Wyoming LLC whose operating agreement happens to reference a smart contract. Members vote. The smart contract may automate the mechanics of voting and execution, but the authority runs from the members to the contract and back. If the contract is silent on some question, the operating agreement governs, and if that is silent, the default rules of the LLC Act fill in. This is the path most existing DAOs will take when they choose Wyoming, because most existing DAOs already have token holders voting on proposals through a governance portal.

An algorithmically managed DAO LLC is the more interesting filing and the harder one to operate. § 17-31-109(b) permits it only where the smart contract is upgradable. The statute is effectively saying that a contract that cannot be fixed cannot be the manager of a legal entity, because the duty to act in the best interests of the company is an active duty and a frozen codebase cannot discharge it. This rules out the purely immutable architecture and pushes algorithmic DAOs toward proxy patterns, timelocks, and multisig-controlled upgrade paths. It also creates a question the statute does not answer: who owes the fiduciary duty when the manager is code? The chapter's answer at § 17-31-110 is that, unless otherwise provided in the articles or operating agreement, members shall have no fiduciary duty to the organization or its members. This is a significant departure from the default of § 17-29-409 and is the provision most likely to be tested in court.

What the statute does not do

Three gaps are worth stating plainly, because the DAO LLC is being marketed as though it closes them.

It does not resolve the federal securities question. Whether a token issued by a Wyoming DAO LLC is an investment contract under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), is determined by federal law, and nothing Wyoming can say about its own entity law will bind the SEC. The Division of Enforcement's July 2017 Section 21(a) Report of Investigation concerning "The DAO" already announced that tokens of a DAO can be securities, and that analysis is unchanged by SB 38. The Wyoming statute changes the entity wrapper; it does not change what is inside the wrapper.

It does not resolve the federal tax classification. An LLC is, by default, a disregarded entity if it has one member and a partnership if it has more than one, under the check-the-box regulations at Treas. Reg. § 301.7701-3. A DAO with thousands of token holders who receive allocations of income is, presumptively, a partnership, which implies Schedule K-1s for holders and withholding obligations on foreign holders under IRC § 1446. The DAO LLC statute does not address this, and the IRS has issued no guidance specific to DAOs. Most DAOs that form as Wyoming LLCs will need a tax opinion before any meaningful distribution.

It does not provide a workable member list. Conventional LLC practice assumes the company can identify its members. A token-governed DAO usually cannot, because pseudonymous wallet addresses are not the same as legal persons and because the membership set is changing with every transfer. Chapter 31 leans on the smart contract to be the member registry; whether that satisfies service of process, KYC obligations on the bank side, or a court-ordered subpoena is not settled. Expect litigation.

Who files one, and when

A Wyoming DAO LLC costs $100 to file, the same as any other Wyoming LLC, per the Secretary of State fee schedule. The annual report license tax is a minimum of $60 for entities with under $300,000 of Wyoming assets, the same as the general rule discussed in our May 2016 Wyoming formation guide. The filing burden is marginal. The substantive work is in the operating agreement and the smart-contract audit, neither of which the state reviews.

The filing makes sense for three kinds of organizations in the second half of 2021.

A protocol DAO that has been operating on-chain with a Swiss association, a Cayman foundation, or no legal wrapper at all, and that has US-based core contributors exposed to unlimited liability. The Wyoming DAO LLC is the first US wrapper available to them, and the limited-liability shield of § 17-29-304 is the reason to use it.

A treasury-holding entity for a protocol that needs a US bank account and a US tax ID to pay US-resident contributors on W-2 or 1099. The SPDI charter at Wyo. Stat. § 13-12-101 et seq. makes Wyoming plausible as a banking jurisdiction in a way it would not otherwise be, at least once an SPDI is fully operational with payment rails.

A closed-loop DAO running an investment club or a collector pool, with identified members, on-chain voting, and a small token set. These are the organizations that will stress-test the statute first, because they have real counterparties who care about the answer.

A DAO that is anonymous, global, and algorithmic, with no identified control party, is not a good candidate. The fiduciary-duty default at § 17-31-110 is permissive, but the court that looks at the filing later still expects someone to answer the phone.

The loose end worth watching

The Uniform Law Commission's Business Organizations Committee has been drafting a model DAO act since late 2020, and the Commission's public drafts have been notably more cautious than Wyoming's statute on fiduciary duties and member-identification requirements. If the ULC finalizes a model act that materially diverges from Chapter 31, Wyoming will have to decide whether to amend or to let the two regimes coexist. The filings through the end of 2021 will tell us whether the Wyoming version is doing enough work for the market to defend.

Sources

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