The Marshall Islands DAO LLC: Strange crossbreed or desirable offspring from the union between a DAO and an LLC?

The Marshall Islands LLC as the offshore sibling of the Delaware LLC

The Marshall Islands (officially the Republic of the Marshall Islands or RMI) is historically linked to the U.S. but gained full sovereignty from via the Compact of Free Association of 1986, which means U.S. laws and regulations do not directly apply to entities domiciled there.

It has a Limited Liability Company (LLC) legal form that is a carbon copy of the Delaware LLC1, making it quite unique amongst the offshore jurisdictions.

In addition, the RMI is not on any tax haven blacklists, despite the lack of any form of tax at the LLC level when its income or assets are generated outside the RMI. As a white-listed country, this means LLCs registered in the RMI can conduct business without fear of violating tax transparency standards.

Other advantages of RMI LLCs are:

• Separate liability. As with their U.S. counterparts, LLC members are not liable for the company’s debts and obligations, and vice versa.
• High protection of assets. Thanks to the separate liability, LLC members’ assets are safe from the company’s creditors.
• High level of corporate anonymity. RMI doesn’t require business owners to publicize the names of company members and managers. Besides, the country allows LLCs to use nominee directors and managers to work on behalf of company members.
• No requirement for minimum capitalization. Business owners can start a Marshall Islands LLC without any paid-up capital, in contrast with a RMI International Business Corporation (IBC).
• Minimal reporting requirement. There is no annual reporting requirement for LLCs. There is also no need to file accounting and auditing records to the government, though companies are expected to keep internal records.
• Marshall Islands Series LLC. Because the Marshall Islands LLC Act is based on the Delaware LLC Act, business owners can form Series LLC. Similar to the Delaware Series, this allows for the formation of LLC “units” with separate corporate structures, members, and managers and separate liability.
• Re-domiciling policy. Any company which was already registered in another jurisdiction can re-domicile to the Marshall Islands with the same entity identification under Marshall Islands law and vice versa.
• No exchange control. The RMI uses the U.S. dollar as its official currency. There are no controls on purchase and sale of local currencies or transfers of any currency, which means RMI LLCs can use and exchange any currency, including crypto, at its convenience.

These factors combined make the RMI quite attractive to set up "offshore LLCs” especially for practitioners and users who are already familiar with the flexibility and pass-through taxation of the U.S. LLC.

However owners of RMI LLCs have to be aware of the economic substance rules for certain business entities registered in the RMI since the introduction of its Economic Substance Regulations of 2018, which similar to other offshore jurisdictions require that “relevant entities” conducting one or more “relevant activities” in the RMI must fulfill reporting obligations concerning their actual level of economic substance there.

Practically, entities registered in the RMI do so by completing an annual Economic Substance Declaration to the Registrar within 12 months from their anniversary date.

Genetically Modified DAOs

For blockchain aficionados, RMI offers the extra lure of allowing membership of LLCs to be tracked on blockchains and smart contracts to be used in their governance.2

Outside of the U.S. (and only certain States such as Delaware and Wyoming), only Panama does so.

Nonetheless, we think it is not correct to call LLCs that use distributed ledger technology for membership and governance purposes “DAO LLCs”.

And removing the requirement for an RMI LLC to have any sort of managers with extra liability and for only threshold members (above 25% of token holding) to KYC themselves does not turn an LLC into a DAO.

More generally, we think the words “DAO” and “LLCs” (or any other existing limited liability company structure) cannot peacefully co-exist in the same sentence:

• DAOs are a whole new coordination mechanism, and therefore cannot - and in our mind should not - be wrapped in the straightjacket of an existing limited liability form, which typically has identifiable shareholders and a board of directors to whom they delegate specific powers. This is antithesis to the fundamentally flat, participatory and faceless nature of a DAO.

• The requirement for threshold 25% token holders in a DAO LLC such as RMI’s to KYC themselves sits uneasily with the transferability of tokens that represent membership of a DAO. Any accumulation of more than 25% of tokens in a DAO LLC would need to trigger some form of KYC mechanism which DAOs do no require.

• Whilst the RMI DAO LLC may be an “LLC light” in that it strips the RMI LLC of some legacy requirements and recognizes blockchain for its membership and governance, it is not a DAO, and naming it a DAO is legal stunt work similar to what Wyoming did with its DAO LLC.3

Are DAO Members irredeemably doomed?

Our aversion to the idea of “wrapping” DAOs is known: DAOs that are shoehorned into existing corporate structure lose the purity of the DAO’s liquid democracy governance model, including the rage-quit ability of its token holders.

Does this mean that DAO Members are therefore irredeemably destined to suffer from unlimited joint and several liability?

We do not think so:

• In an interim stage in which DAOs are not given legal personhood, DAOs can benefit from a limited liability protection shield by owning and controlling a limited liability entity. This is essentially what OtoCo achieves when users connect their multi-sig DAO wallet as the first Member of a real-world LLC or Swiss Association. Via such real-world conduit, a lot of the functions such as bank account opening, employee contracts etc. can be gained from controlling an entity that has limited liability rather than the DAO wrapping itself in limited liability .
• As DAOs become more widely used, we expect that they will eventually acquire legal personhood and gain limited liability, probably first via international private law followed by formal recognition through case-law or statute.

Grassroots entities

Let’s not forget that this is what happened with LLCs in the United States, which are a relatively recent corporate form and - together with the Series LLC - originated from the demands of primarily the U.S. real estate sector, who demanded a more flexible limited liability entity with partnership-like pass-through taxation but without the rigidities of a partnership structure.

Since, LLCs have become the dominant corporate form in the US and are widely used by both US and non-US owners.

In this light, rather than legal stunt work, jurisdictions such as Wyoming and Tennessee but also the Republic of the Marshall Islands would do better finding ways to recognize DAOs in their pure form, as a new form of decentralized coordination mechanisms that could only have emerged because of the arrival of blockchains as the enabling technology, and grant them legal personhood and limited liability.

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