The world is quickly embracing digital technologies and decentralization. This shift has enabled the emergence of a new kind of organization, known as a Decentralised Autonomous Organisation or DAO. These organizations operate on blockchain-based smart contracts and enable digital collaboration between distributed groups of people. In this article, we will go over the DAO setup in Estonia process.
Legal Challenges of DAO Setup in Estonia
The challenge for DAOs is that the legal frameworks in most countries are not designed to accommodate novel digital organizations. This creates a need for new legal structures, such as liability wrappers, which can provide some form of protection and clarity around the operations of the DAO. In Estonia – one of Europe’s leading technology hubs – there are two legal vehicles that can be used to provide such a wrapper: private limited companies (in Estonian, osaühing or OÜ) and non-profit associations (in Estonian, mittetulundusühing or MTÜ).
Estonian Legal Solutions for DAOs
Estonian law allows for the formation and operation of fully virtual general meetings, meaning that members of the management board are not required to attend in person. Shareholders and members of all legal entities, such as private limited companies and non-profit organizations, are also entitled to adopt resolutions without calling general meetings. This enables voting on discussion channels, such as Telegram, Slack or Discord.
Moreover, with Estonia’s e-Residency programme, incorporating and operating a DAO has become even easier. The programme allows people to register their legal entities online without having to travel to Estonia. This means that those involved in the DAO can manage its operations remotely from anywhere in the world, while enjoying the legal protection offered by Estonia’s robust and forward-thinking regulatory environment.
2 DAO Setup in Estonia Methods:
- “Entity-less” DAO: If a DAO is built with the intention of having no centralized entity, then it can make use of e-Residency to register and manage its services. E-residents can incorporate and run their legal entities in Estonia all online, without needing to travel here.
- “Legal wrapper” DAO: If the builders or founders of a DAO are willing to give up some decentralization (at least at the initial stage), designate trusted representative(s), and intend to achieve some non-profit purpose(s), then they could use a non-profit association as their legal wrapper. This would control the smart contracts underlying the DAO’s protocol and direct the actions of the DAO treasury to foster the development and growth of a decentralized ecosystem, while maintaining its non-profit nature.
4 Major Benefits for Entrepreneurs
For entrepreneurs looking to launch a DAO in Estonia, there are three major benefits:
- Legal certainty: Establishing a legal entity such as an OÜ or MTÜ provides a solid framework and allows the DAO to operate with greater legal clarity, reducing risk exposure.
- Flexibility: The non-profit form of the organization gives founders more flexibility in terms of voting procedures and decision-making.
- Ease of access: With the e-Residency program, it is already possible to manage businesses remotely and run them from anywhere in the world.
- Tax incentives: Private limited companies must pay taxes only on profits created from economic activities outside of Estonia, while non-profit associations are exempt from corporate income tax.
The legal framework in Estonia provides a supportive environment for DAOs and makes it possible to minimize their legal exposure. Private limited companies and non-profit organizations combined with e-Residency digital solutions open up exciting opportunities for the decentralized digital world and make it possible to conduct business in a secure, transparent, and efficient manner.
At LEGID, we provide Web 3 Legal services and expertise to help you navigate the legal framework for DAOs. Whether you are just getting started with your project or have been operating a DAO for some time now, we are here to offer our support and make sure that everything is done according to the law.