DAO LLC in Texas
Decentralized Autonomous Organizations (DAOs) structured as Texas LLCs combine blockchain governance with traditional liability protection. Understanding their legal recognition and tax obligations is key to compliance and operational success.
Relevant Code & Tax References
- Texas Business Organizations Code §3.003 defines an LLC as a “legal entity” separate from its members.
- Texas Business Organizations Code §101.106 allows LLCs to establish operating agreements governing internal affairs.
- IRC §7701(a)(3)—provides that an LLC can elect its classification (e.g., partnership or corporation) for federal tax purposes.
- IRS Virtual Currency Guidance (Notice 2014-21) treats cryptocurrencies as property for tax purposes.
Key Forms & Filings
- IRS Form 8832 (Entity Classification Election) to elect partnership or corporation status.
- IRS Form 1065 (U.S. Return of Partnership Income) plus Schedule K-1 if taxed as a partnership.
- IRS Form 1120 if taxed as a corporation.
- Texas Franchise Tax Report (Form 05-158) filed annually by the LLC.
Detailed Example
“BlockChainDAO LLC” is formed in Texas by 50 token holders. They adopt an Operating Agreement specifying governance via smart contracts on Ethereum. Tax treatment options:
- Default (Partnership): File Form 1065, issue Schedule K-1s allocating income per token holdings.
- S-Corp Election: If filing Form 2553 by March 15, file Form 1120S and issue Schedule K-1s under subchapter S.
Year 1: - Total revenue $1,000,000; expenses $200,000 → net income $800,000.
- Passed through to 50 members: $16,000 each (assuming equal allocation).
Step-by-Step Guide to Compliance
- Formation & Operating Agreement
- File Certificate of Formation with SOS (Form 205).
- Draft Operating Agreement detailing DAO governance, token-holder rights, and tax allocations.
- Elect Federal Tax Classification
- By default, multi-member LLC = partnership (Form 8832 not required).
- To elect corporate or S-Corp status, file Form 8832 or Form 2553 timely.
- Recordkeeping & Token Tracking
- Maintain detailed records mapping token balances to profit/loss allocations.
- File Federal Tax Return
- If partnership: file Form 1065 by Mar 15; issue Schedule K-1 to members.
- If corporation: file Form 1120 by Apr 15 (or 1120S by Mar 15 with S-elect).
- File Texas Franchise Tax
- Annually file Form 05-158 by May 15, reporting the LLC’s total revenue.
- Report Crypto Transactions
- Treat token transfers and sales per Notice 2014-21 as property dispositions; report capital gains/losses on Schedule D (Form 1040) for individual members.
Conclusion
A DAO LLC in Texas enjoys the same liability shield as traditional LLCs, but must carefully manage its Operating Agreement, tax classification elections, and crypto transaction reporting to ensure compliance with both Texas and IRS requirements.
Schedule a Consultation
Discuss your DAO LLC structure and tax strategy with our CPA, Anshul Goyal:
https://calendly.com/anshulcpa/
Disclaimer
This blog provides general guidance on Texas DAO LLC formation and tax treatment and does not constitute legal or accounting advice. Always verify current requirements with the Texas Secretary of State and IRS. For tailored assistance, consult Anshul Goyal, CPA EA FCA—a licensed CPA in the United States and Enrolled Agent before the IRS—who specializes in emerging blockchain entities and tax compliance.
About Our CPA
Anshul Goyal, CPA EA FCA, has over a decade of experience advising cutting-edge blockchain businesses on entity formation, operating agreements, and tax compliance, bridging the gap between decentralized governance and traditional finance.
Top 5 FAQs
1. Are DAOs recognized as LLCs in Texas?
Yes—Texas allows any LLC formation; governance via smart contracts does not change legal status.
2. How are tokens taxed?
Treated as property under IRS Notice 2014-21; dispositions trigger capital gains/losses.
3. Do token holders need Schedule K-1?
Yes—multi-member LLC taxed as a partnership issues Schedule K-1 to each member.
4. Can a DAO LLC make an S-Corp election?
Yes—if qualifying members (<100 U.S. persons) file Form 2553 by Mar 15.
5. What if governance changes mid-year?
Amend Operating Agreement and maintain records; allocations follow agreement terms.