Upfit your LLC: OtoCo now lets you form and govern a Multi-Member LLC onchain, using mirror tokens to represent Members' ownership rights

In mid-2020, OtoCo pioneered onchain LLC formation, using Ethereum smart contracts to create Member-Managed LLCs natively on blockchain.

Since, we have focused our development efforts on 3 key areas:

1. We like to think we improved significantly on end user experience.
2. We modularized our codebase to prepare for the launch of our dAppstore in 2023, which will let users purchase bolt-ons for their entities developed by OtoCo but also by third-party developers.
3. We pioneered ownership of an LLC by a DAO, by letting a multi-sig wallet connected to OtoCo via Gnosis Safe become the single Member and Manager of an LLC.

Natural progression

A natural progression from here was for a Single Member to invite more Members, turning it into a Multi-Member LLC.

“Multi-Member” is a term that’s typically used in filings and on IRS forms etc. but essentially means that there are multiple owners - called Members in the context of an LLC vs. stockholders in a C-Corp.

In OtoCo’s Multi-Member LLC design, each of the Members see their ownership stake mirrored in the amount of tokens they hold, hence we speak of “mirror tokens”.

Such mirror tokens map real-world ownership claims on a fraction of the LLC’s assets on blockchain. Since blockchain by its nature keeps track of who holds mirror tokens, Members get captable software thrown in, courtesy of Ethereum!

Full paid-up Membership

In addition, holders of the mirror tokens have the same rights and obligations as Members in an analog LLC.

For instance, in the default setup, Membership however can’t be transferred without approval from a majority of the other Members.

If a Member wants to sell his/her Membership, he/she needs to make a Proposal which the other Members vote on.

In such scenario, Members are given a “right of first refusal” to buy the shares of a selling Member at the same or improved price of a third-pay offeror.

This is to prevent that “undesirable” Members sneak into the ownership base, and couples tightly with how Multi-Member LLCs are governed in a typical realverse setup.

Multi-Member vs. DAO-controlled LLCs

This means OtoCo’s Multi-Member LLC lends itself ideally to projects with a limited number of members who will likely know each other or have some degree of proximity, in contrast with our multi-sig or DAO-owned LLC product where anonymous token holders as a collective own the LLC as a Single Member.

We make this choice of control clear in the very first screen following the homepage start button:

In essence, this selector gives users the choice to locate control at the Member level in case of a Multi-Member LLC, or at the DAO level via a multi-sig if they select a multi-sig or DAO-controlled entity.

From one to many

If you select to spin up your LLC with one or more Members, your connected wallet will be the first Member and Manager of the LLC. Once formed, you will be able to add more Members and change Managers if you wish so.

Next, you’ll check if your preferred name is available:

You will now be asked to connect your wallet:

This can be done via MetaMask, WalletConnect, Trezor or Ledger:

TIP: If you want to test OtoCo without creating a valid legal entity, choose the Goerli testnet on Ethereum or Polygon’s Mumbai testnet!

Activation

Once connected, you’ll see an overview screen before activating your new entity:

The prefix to your entity’s wallet address will show which network you are working on.

The activation itself typically takes less than a minute and gas fees too are typically very low:

Oto will waive at you when your new entity is validly formed:

TIP: You can also upfit an existing entity you spun up on OtoCo! Just connect with the wallet you used to spin up the entity with, select the entity from the Dashpanel, click “Manage” and select the Add Members plugin from the Plugins menu to your left.

See below how this looks like for Buterin LLC, one of the first Delaware LLCs spun up on OtoCo back in July 2020:

Add Members dApp plugin

You can now click through to your new entity’s Dashpanel which gives you an overview and shows the NFT as proof of your new entity’s existence.

Note: the NFT shown here is for the Goerli test network, NFTs for entities spun up on Ethereum and Polygon mainnet will look different (and better!).

Next, click on Plugins:

You will now see a number of panels. Each panel is a plugin that enhances your LLC. To invite more Members, you will be issuing mirror tokens and initiate a new governance protocol that takes into account that your LLC will have multiple Members.

Click the panel titled “Add Members” bottom right:

The opens a new section that lets you initiate the issuance of “mirror tokens” which will then be distributed to the respective wallets of the new Members you invite:

You can either issue new mirror tokens or link to an existing token if you already issued tokens that represent ownership of your project.

For a new token, specify its characteristics (name, ticker and quantity) and click “Continue”:

This will bring you to a section that lets you carve up ownership in your LLC by distributing mirror tokens to new Member wallets you paste in:

After pasting the wallet addresses of your new Members, you need to select who will be Manager and set a voting period for governance Proposals.

Issue mirror tokens that reflect ownership percentages

“Continue” to get an overview of how your LLC ownership will be tokenized. Click “Create LLC Ownership Token” if you’re ready to proceed:

You will see a screen similar to the below whilst your LLC is being upfitted from Single Manager to Multi-Member LLC:

Once the transaction is confirmed, all that is left to do is activating the governance contract so Members can table Proposals and organize votes onchain:

The activation should not take more than a minute and brings you to a section that allows you to manage your Multi-Member LLC onchain, consisting of three main functions accessible via horizontal tabs:

1. Proposals
2. Membership
3. Settings

Tab 1 - Proposals

Think of Proposals as shareholder or director resolutions on all matters reserved for the shareholders or directors in a company.

The Proposals tab gives an overview of the status of each Proposal that has been tabled.

Member Proposals

The logic is as follows:

• All Members have access to the LLC’s dashboard by connecting their respective wallets and all Members can table a Proposal.

They will do so by initiating a Plug-in, e.g. an OtoGO launchpool campaign or opening a Digital Asset Wallet for the entity.

For instance, the screen below shows what happens if the Member with wallet ending 9A7E seeks to activate the Digital Wallet plugin:

• Because the earmarking of a wallet that will hold digital assets on behalf of the LLC is an important act, similar to opening a company bank account, it is a decision that needs to be approved by the majority of the Members.
• As a result, it will show up as an active Proposal together with an indication of how much time is left before the Proposal lapses:

• During this voting window, Members can actively cast their vote or abstain.
• A Proposal will be adopted if within a quorum of 51% of Members voting, a 51% majority is reached.

• When a Proposal is adopted, the Plug-in voted on will deploy. When it is rejected or when the voting window is closed, it will lapse.

  

Manager powers

Our smart contract design also caters for delegation of powers, as it is impractical to expect Members to vote on day-to-day matters - an issue that plagues many DAO coin voting protocols!

OtoCo’s approach is for Members to vote on an enumerated list of powers that will be delegated to the Manager of their entity. We call this list the “Allowed Contracts”.

These “Allowed Contracts” are smart contract plugins which can be deployed by the Manager without any further vote by the Members. Manager powers can also be taken away from a Manager or new powers can be added at any time by way of a Member vote.

The net result is a system of blockchain-enforced delegation of power and accountability: Managers are given a plug-in toolkit which they can deploy at will, with technology limiting the possibility of Managers acting extra vires.

Note that Managers do have the power to table Proposals on matters that need a Member vote. In contrast with member-tabled Proposals, Manager-tabled Proposals will automatically pass if no majority of Members has objected to them within the voting window.

Tab 2 - Membership

The second tab is a “captable” showing all current Members of the entity.

As mentioned above, by virtue of the mirror tokens living on blockchain, the captable is real-time, courtesy of Ethereum.

This section breaks out the Membership interest held by the connected wallet and shows the % for each Member:

Tab 3 - Settings

The last tab shows setting for the LLC governance.

Apart from the Manager wallet address, these include:

• Changing the voting period;

• Changing the Manager’s Allowed Contracts;

• Replacing the Manager.1

Each of the above actions will trigger a Member vote.

A final dropdown lets Members change the Voting Period.

An analog fallback

Because some users tend to find comfort in analog long form legal agreements, we made sure that the Files and Templates section of the left-hand panel of the Dashboard populates legal templates for most corporate actions, in addition to a PDF version of the Operating Agreement for the LLC itself.

However, by their nature smart contracts are contracts and though largely untested, we believe they will be analyzed in the same way as analog contracts as to their binding powers. Here, code clearly is (contract) law.

CONCLUSION: Why should you use the Multi-Member LLC?

The U.S. Commodities Futures Trading Commission’s charges against Ooki, though in the eyes of many predictable, are nonetheless spooky.

They show that founders transferring control to a DAO does not shield them from personal liability if the DAO is engaging in activities that are deemed unlawful.

It establishes a regulatory precedent that DAOs are not immune from enforcement and may not violate the law with impunity.

LLCs offer a limited liability shield for Members who, if the LLC would be found in breach of the law, limits the liability of individual Members (with limited exceptions).

They should be the preferred vessel for anybody taking risks as an individual doer or as part of a team deploying code.

As we blogged about earlier, LLCs are attractive especially for non-U.S. entrepreneurs, since LLCs that are wholly owned by non-U.S. residents keeps the LLC out of the U.S. tax net, unless any of the Members performs work for the LLC whilst physically present in the U.S.2

Also for U.S. entrepreneurs, an LLC is a predictable entity with known reporting requirements, and taxes only really kick in when an LLC turns a profit and distributes it to its Members (though the situation for U.S. Members is more nuanced and each should seek independent tax advice on this).

An optimal stack may be emerging for both Multi-Member LLCs and LLCs controlled by a DAO or multi-sig:

• In a Multi-Member LLC, each wallet that is Member could in turn be held by a Single Member-Manager LLC spun up on OtoCo (for free ex gas costs!) to insulate individuals who control the wallet’s private keys. Instead of them individually controlling the private keys of the Member wallet, they control the company that owns the wallet that is Member of the Multi-Member LLC.
• The same principle can easily be implemented for users whose wallets own a project’s token and vote as part of a DAO, or whose wallet are part of a multi-sig: those wallets should ideally be held by a Single Member LLC spun up on OtoCo rather than controlled by the individuals themselves. This Single Member LLC then controls the wallet that holds DAO governance tokens or is part of a DAO multi-sig, and the DAO in turn controls an LLC spawned on OtoCo.

The above reflect our strong belief that nothing should ever be done in personal name: limited liability wrappers are not an invention of the state but in essence a contractual and recognized legal fiction that provides a shield to all of us who take risks, onchain or offchain.

OtoCo’s mission is to further compress the time and cost to make such wrappers available to the widest possible user base.

Its roadmap is to bring the benefits of easy onchain formation and maintenance to valid legal entities, and the current release of our Multi-Member LLC is only the beginning of the type of corporate actions users will be able to perform from their wallets.

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