Non-Profit vs. For-Profit

Non-Profit DAO LLCs vs For-Profit DAO LLCs

Non-Profit DAO LLCs

• Are completely tax-free, just like a Cayman Foundation, Swiss Association, and other popular offshore jurisdictions.

• Do not have economic owners (only Members with governance rights) and must spend their money only on furthering their business purpose.

• Can still compensate Managers (if any), Members, and other service providers with reasonable compensation for their work.

• Are allowed to have governance and/or utility tokens which apprecaite in value.

For-Profit DAO LLCs:

• May distribute profits to their owners as dividends (Members).

• Are subject to a 3% gross revenue tax, which does not apply to invested capital, capital gains, or dividends.

Can a Non-Profit DAO LLC Make and Spend Money?

• Non-Profit DAO LLCs are allowed to make money, i.e., generate a profit of their own, in addition to optionally raising money through donations.

• Non-Profit DAO LLCs must spend their money on charitable, religious, scientific, educational, social, or other “good works," for example, to develop, support, govern, and promote open-source software, which is then made available for use on public blockchain networks.

• Non-Profit DAO LLCs can make reasonable payments to their Members, Managers (if any), and others in exchange for goods or services, including management or software development.

Can my DAO LLC be Non-Profit?

• Here is the definition of a non-profit from the Non-Profit Entities Act:

  • Any entity that exclusively engages in raising or disbursing funds for purposes listed below may be granted non-profit status:

    a. Charitable;

    b. Religious;

    c. Scientific;

    d. Educational;

    e. Social;

    f. Fraternal; or

    g. Any other types of “good works” if:

    • i. no part of its net earnings inures to the benefit of any person or individual;

    • ii. its activities do not exclusively involve disseminating propaganda or otherwise attempting to influence legislation; and

    • iii. it does not participate in, intervene in, or disseminate statements on behalf of or in opposition to any candidate running for public office.

• A key item, as referenced above, is that "no part of its net earnings inures to the benefit of any person or individual", for example, as dividends. However, non-profits can still make reasonable payments to their Members, Managers (if any), and others in exchange for goods or services, including management or software development.

Converting from a For-Profit to a Non-Profitor vice versa

• It is not possible to convert a non-profit DAO LLC to a for-profit DAO LLC or vice versa. However, you can do things similar to a conversion, such as setting up a new non-profit entity and sending your assets from the for-profit to the new non-profit DAO LLC.

Example: Investment DAOs

• A For-Profit DAO LLC is likely a better fit for an investment company, as the non-profit cannot distribute dividends from its earned profit.

Example: Protocol DAOs

• It is common for blockchain protocols to be associated with a DAO, which develops, markets, and governs the protocol.

• The activity of the protocol is generally structured as separate from the DAO, so people may be making money off the protocol (e.g. through staking, liquidity providing, token appreciation, etc) while still allowing for the DAO's legal entity to remain non-profit.

• Many projects utilize a "dev co", "op co", or "lab co" associated with the protocol and DAO, which allows for the project to have a for-profit entity, which can distribute profits and complement the non-profit DAO. In these cases, the non-profit DAO often pays fees to the for-profit entity.

• Read more on our corporate structuring for DAO LLCs page.