Corporations have a lengthy history. The roots of the corporate form can be traced into antiquity, through medieval Italy, and into America as early as the founding. By the 19th century, corporations operating in the US started to move away from government-chartered entities to private ones. One good thing about the corporate form’s age is its developed body of caselaw that provides predictability about how issues will be resolved by the courts.
In 1977, the state of Wyoming pioneered a new type of business entity: The Limited Liability Company. The idea of this new, hybrid entity is that it would offer the liability shield of a corporation as well as the flexibility and tax advantages of an unincorporated entity. Florida followed in permitting LLCs in 1982, with California late to the party in 1994. Thus, the California LLC still a somewhat new entity, and so the resolution of some legal issues regarding it are not yet well-settled.
Wyoming has again placed itself in the vanguard of pioneering new corporate forms. It recently passed new legislation allowing for “decentralized autonomous organizations” to do business. The bill’s summary provides: “A decentralized autonomous organization (DAO) is a limited liability company with special provisions allowing the company to be algorithmically run or managed (in whole or in part) through smart contracts executed by computers.” The bill specifically references “blockchain,” which it defines as “a digital ledger or database which is chronological, consensus-based, decentralized and mathematically verified in nature.”
In contrast to the purely human-run LLCs we have in California and other states, “[m]anagement of a decentralized autonomous organization shall be vested in its members or the members and any applicable smart contracts.” “Smart contract” is defined to mean:
an automated transaction … or any substantially similar analogue, or code, script or programming language relying on a blockchain which may include taking custody of and transferring an asset, administrating membership interest votes with respect to a decentralized autonomous organization or issuing executable instructions for these actions, based on the occurrence or nonoccurrence of specified conditions.
OK, so it’s not exactly SkyNet. People write the smart contracts, which just operate as programmed. But, that said, just as the concept of Bitcoin was that of a currency free from the control of a central actor (e.g., a government or central bank), the DAO is a corporate form that, once set in motion by humans, can be free from a control by a human manager. The goal would seem to be to reduce the management disputes that often plague LLCs. That sounds good, as long as things like this don’t happen.
While the idea of an automated corporate form is a radical and new concept, Wyoming has placed DAOs in the category of LLCs, specifically declaring that the Wyoming Limited Liability Company Act applies to them. This was likely done to prevent them from being treated like the a general partnership for liability purposes, which visits joint liability for partnership debts and obligations on its members. But no doubt, if this unprecedented form of doing business takes off, courts will have to resolve some new and novel questions specific to them.
Wyoming’s cutting-edge legislation permitting DAOs does not stand alone, but is part of a larger, ambitious program by the Cowboy State to be a home base for doing business with crypto, much like Delaware became for corporations decades ago. In recent years, it has passed legislation with favorable provisions concerning regulatory, taxation and investor privacy considerations for entities dealing in digital assets. For example, in 2019 it passed an act that “establishe[d] the legal nature of digital assets within existing law, dividing these assets into three categories of intangible personal property and classifying these assets within the Uniform Commercial Code” (a set of laws governing commercial transactions designed to facilitate interstate commerce). The same act also “a]uthorizes banks to voluntarily provide custodial services for digital assets.” Will be interesting to see how it goes for Wyoming, and if other states follow suit.