Non-profit

Background

An unincorporated non-profit association (UNA) is a format for protecting assets and giving a legal identity to projects serving a social purpose. Open source software projects and others that benefit the public over generating profits can qualify as an UNA under state law.

UNAs can be created by two or more members through agreement without the need for state filing. They therefore are friendly alternatives to formal registration as a legal entity with the State with many of the same benefits but also greater anonymity for members.

On-chain Formation

Wrappr provides a form of UNA agreement that is drafted to attach to accounts through minting an NFT and provide qualified code deference, stored on Ethereum and IPFS (Delaware copy (opens new window), Wyoming copy (opens new window)).

A good practice for DAOs would be to pass a governance proposal to vote on the formation of the UNA, this way it proves that there's an agreement by members.

Examples

Examples of DAO UNAs in the wild include Idle DAO (opens new window) and LexDAO (opens new window). Legal authors (opens new window) have also argued that groups defined by a notable public purpose and organized via smart contracts should already have limited liability for their membership as UNA, such as the original Moloch DAO (opens new window).

DAOs & UNAs

If an UNA agreement is silent, model law (opens new window) prohibits transfers of membership interests by default, so these should be included in a UNA's agreemnt, dictating when transfers should be allowed.

Care should be taken when distributing assets to UNA members as this may prevent it from retaining its limited liability as a non-profit venture. Note, however, UNAs may engage in activities that produce profit so long as they are in furtherance of the non-profit purpose.

DAOs with Siloed Protocol and Treasury Entities

Even though UNAs are probably the most suitable entity type for non-profit DAOs, there are some potential risks involved, i) if for any reasons the members decide to distribute profit resulting in a challenge to the liability limitations and ii) changes in law that might affect its categorization as a not-for-profit organization.

So, DAOs might opt for a "siloed" entity structure, wrapping it's treasury in a UNA and then using a separate enitity type for the protocol, like an LLC. This could give a DAO more flexibility than a fully wrapped DAO in case they chose to engage in for-profit activities, since their protocol and treasury would now be in two separate entities, meaning that the treasury would keep its organizational structure independent of any decision made by the protocol. However, siloed structures have share the same risks as a DAO fully wrapped as a UNA (members actions could still challenge their limited liability status), plus there's another layer of complexity given their dual structure and some tributary issues may arise if entities are filled in different taxing jurisdictions [1].

Taxation

UNAs are taxed as corporations (21%) unless other election is made. However, since no dividends can be distributed to members without disqualifying UNA, taxation is effectively limited to the entity level. They must file estimated taxes each quarter and file annual tax return [2].

References

[1] https://a16zcrypto.com/wp-content/uploads/2022/06/dao-legal-framework-part-1.pdf

[2] https://daos.paradigm.xyz/