Use of a Fiscal Sponsor as a Legal Wrapper/Legal Entity for Aragon DAOs

For some time, I’ve been thinking about the use of a fiscal sponsor for handling payments for DAOs created with Aragon. I did some research and found out about the Open Collective platform and its innovative use of fiscal sponsors.

Potentially, the use of a fiscal sponsor might help those of us organizing DAOs to solve the legal entity and legal wrapper issue for funds collection, invoicing, and payments. You can find out more about how Open Collective works here:
https://docs.opencollective.com/help/collectives/collectives

Within the context of a DAO, basically when a client wants to sponsor, donate to, or pay a DAO, they pay a fiscal sponsor instead (usually a nonprofit with legal status), and the fiscal sponsor in turn pays the individual members of the DAO for work done, or reimbursement for items or expenses paid on behalf of the DAO (such as DAO related computer equipment or travel expenses).

A fiscal sponsor could have multiple projects or collectives under its wing and handle funds collection and payments for all of them. This opens up the possibility for a DAO to operate separate projects or collectives under the umbrella DAO, with separate accounting for each, and have all funds collection and payments handled by a single fiscal sponsor.

Open Collective is a platform that enables projects to raise money without having a legal entity or bank account. The use of a fiscal sponsor facilitates these fiat transactions, from the sponsor/donor to the fiscal sponsor, and from the fiscal sponsor to the individuals who supply the goods and services.

Open Collective also provides a platform for transparent accounting where the movement of funds can be seen and tracked and invoices can be submitted and paid transparently.

Open Collective is fiat based, but perhaps a similar structure or fiscal sponsor could be used for Aragon based DAOs. A DAO could deal solely with crypto, or both crypto and fiat. If fiat is handled, then it may be easier to use the Open Collective platform.

@burrrata @LouisGrx What do you think about this?

I think the use of a fiscal sponsor opens up interesting possibilities!!! :heart_eyes::smiling_face_with_three_hearts::heart_eyes:

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I think the concept is really interesting and would love to see something like this materialize!

I have recently done some research in similar directions to try and create a legal structure that would allow 1Hive to provide effective and low cost legal wrappers for project initiatives using a Delaware Series LLC. We figured if we could get it right we could offer the same solution to many other DAOs so long as they followed prescribed accounting practices.

The fiscal sponsorship model, or legal proxy model, has the potential to solve a lot of operational issues when trying to run a traditional business using an Aragon organization, but at the same time requires quite a lot of research and legal and accounting engineering to get something that would be practically useful.

At the moment we have opted to keep our main DAO isolated and without funding and then operate a (currently single member LLC) separately. The LLC can engage in legal contracts, send and receive invoices, and open a bank account as you would expect any normal legal entity to do. The DAO on the other hand has a community allocations process like the CRDAO and is used to coordinate the social aspects of the 1Hive community currently.

However this is not at all ideal, we want these orgs to be one and the same, and to be able to easily link additional orgs using the series structure described here, such that each series would be compartmentalized and could have its own ownership interests and manage crypto funds independently while also being able to engage in legal agreements directly and maintain limited liability. However, the legal and especially accounting logistics are still open challenges for us and so we are opting to move slowly and cautiously in order to avoid creating too much of a mess for ourselves.

I think the main challenge relative to something like Open Collective, is that in their model the fiscal sponsor is a hub that manages sub-accounts. A project that uses the fiscal sponsor can manage the sub-account, and individuals can receive funds from the fiscal sponsor. However, the project (AFAIK) does not have the ability to enter into contracts itself and so the ability to replicate the exact flow to a more general for-profit business (eg a consulting business) may be limited in practice.

Additionally, because the fiscal sponsor is making payments, it has to follow and enforce standard accounting practices. In order to make that work for Aragon DAOs which very much allow you to do anything, the fiscal sponsor would need to make significant adjustments to Aragon in order to lock down the processes sufficiently in order meet their accounting requirements so there is definitely both a fair amount of work as well as a fair amount of compromise in terms of the capability of the end result that would likely need to be made.

If you decide to pursue this would love to swap notes further. :smiley:

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This is very interesting! Thanks for digging this up :slight_smile:

I think OpenLaw is also creating an escrow type service (credits to @joeycharlesworth for making me aware of this), but I think it’s only for crypto to crypto payments. Having the option for crypto and fiat would be nice. Then, in the example of the Funding Proposal: Test the Viability of DAO Consultants, the DAO would act just as a trustless and transparent reputation system, but the consultants would be independent contractor’s with every client they work with.

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How about this?

  • A group of interested individuals from the Aragon community can create a new legal nonprofit entity which acts as a fiscal sponsor for Aragon based DAOs. This fiscal sponsor could charge a fee for its services.

  • The nonprofit/fiscal sponsor could be enabled to accept both crypto and fiat payments.

  • Since the nonprofit/fiscal sponsor emerged from the Aragon community, it could tailor its services to meet the needs of Aragon users and be in line with Aragon’s vision and values.

  • Actually, the Aragon Association or any existing Aragon nonprofit with legal status could serve as a fiscal sponsor for DAOs created on the Aragon platform.

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“the project (AFAIK) does not have the ability to enter into contracts itself” - this actually could be more of an asset than a liability. :grin:

Well, I suppose the DAO could have its own letterhead, logo, and stationery, even an address. DAO reps could negotiate on behalf of the collective DAO. I mean, meetings and discussions always happen among individuals anyway. But you are right, any contract would have to be entered into by the fiscal sponsor. However, for small and moderate donations and such, usually there is no written agreement (unless you are setting up a huge endowment or something). The client/sponsor/donor would pay the donation to the fiscal sponsor, and the fiscal sponsor would issue a receipt for tax deduction and charitable donation documentation purposes.

@lkngtn Yeah. Let’s swap notes! :smiley:

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The escrow service is cool. I have been exploring fiscal sponsorship, trusts, powers of attorney, and agency/contractual type services to deal with the legal entity/legal wrapper issue for DAOs.

Yup, the DAO then would still retain all its DAOness and be used for work organization, the exchange of ideas, and promoting the objectives of the DAO and its members. Even though the consultants are working independently on their own assignments, as freelancers they would benefit hugely from a collegiate atmosphere among peers with similar goals and interests.

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For those contemplating the creation of a nonprofit entity solely for their DAO, what I do know as a fact is that the vast majority of nonprofits become inactive or dormant after a while and have very little funds at their disposal.

So most of the time, it is overkill to create a nonprofit, open a bank account, etc. for all your nonprofit ideas and side projects. It is better, more efficient, and a huge time and cost saver for an existing compliant nonprofit to remove much of that paperwork and administrative burden from you. You can also benefit from their longstanding experience in running a nonprofit.

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Could you please provide a bit more details on the accounting challenges here @lkngtn ?

Same here, any insights on the challenges we may face would be super helpful :grimacing: :pray:

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Questions re Open Collectives

This Open Collectives thing is really interesting!! I’m excited to see projects providing more flexibility to community initiatives and DAOs :smiley:

However I don’t get why the fiscal sponsorship or legal proxy model is avantageous vs. the model described below by @burrrata where the DAO is simply coordinating freelancers.

In the latter case the main DAO could centralize payments from clients and forward them to freelancers. Freelancers invoice the clients directly. Moreover, using a legal proxy or Open Collectives Consultants would still have to issue invoices and have their own legal entity set-up.

Isn’t the legal proxy just adding an intermediary in the process? Is the advantage that we have a central hub with an access to a bank account and fiat?

Another question that comes to my mind is that open collectives is designed to ‘collect recurring or one-off contributions from sponsors, backers, or members’. Is there any way we could tune our consulting initiative to fit within this legal framework?

There is a possibility to open our own Fiscal Host. I’d be curious to go through the process and report what we find here! It might be worth it as well to ping people from Open Collectives. They may have valuable insights for us!

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Hi Louis! Love your awesome feedback!!! Been mulling over the same thoughts as you! :smiley:

If we have two scenarios:

  • Scenario A: An individual, project, business, or organization paying a freelancer directly.

  • Scenario B: An individual, project, business, or organization paying an established nonprofit organization with the donation being tax-deductible.

As a general rule, the chances of a deal closing with Scenario B is higher. Both individuals and organizations alike feel more comfortable dealing with and paying an established organization. This is especially true if a freelancer for hire is personally unknown to them. People believe that established organizations are more trustworthy and that they will keep their word. If something goes wrong, the organization could fix it or provide an alternative solution. An organization typically does not suddenly disappear like a freelancer could.

In terms of one-off or recurring contributions, to make it less awkward, a DAO such as DAO Consultants could have a primary stated purpose of education and teaching the world about the benefits of organizing initiatives with Aragon DAOs. Consulting work is very closely related to that mission. Many corporations, even mega ones, would not have a problem contributing toward an educational/open source initiative, especially when their payments are in the form of a tax-deductible donation to a nonprofit organization (the fiscal sponsor).

Check out this Open Collective contribution page for Babel. There are corporate sponsors, like Adobe, Airbnb, Google, even Coinbase:

What do you think about this?

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Nice! All of that makes sense to me! It would be nice to sync on a call next week to discuss extensively and pick one or the other scenario and dig more. What do you think? :slight_smile: @burrrata may want to join as well. We can report findings on this thread!

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Hi Louis,

Sounds good!

I could always test either scenario with the potential clients and see which one they prefer? I mean we could even give them both options.

Here’s BitMEX:

According to that page, BitMEX contributes $500 monthly to Babel and $100 monthly to Sinon. The Open Collective site is very transparent. So we have to be careful with the mission statement as people associate contributors with the causes they contribute to.

Hmmm…if Aragon is a fiscal host on Open Collective, it might attract some of the collectives and communities there to form an Aragon DAO! Some of them look like great candidates for an Aragon DAO.

The idea is that the reputation DAO would act as a signal of integrity and reliability for consultants that are ranked highly. Not saying that this would solve all problems, or that it’s the best idea for this use case, but this is the exact thing the reputation only model aimed to address.

I’m so into this. Let’s make it happen! :slight_smile:

Wasn’t the goal of the DAO Business Models and Consultants to be for profit though?

Yeah totally. That would be awesome.

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I’ve started a related community thread about what could happen if Aragon Association or another Aragon DAO became a fiscal sponsor:
How Aragon DAOs can empower and enhance Corporate Social Responsibility (CSR) and Corporate Shared Value (CSV)

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According to Open Collective, a fiscal sponsor could be any legal entity, including an individual, since a human being is a legal entity. So the fiscal sponsor could be a for-profit entity such as an LLC or corporation as well.

Since Aragon software is open-source and somewhat experimental, I feel that a nonprofit fiscal sponsor is more suitable and makes it easier to collect donations from companies.

What we could do is this:
Create an offering to collect contributions:
*$500 monthly contribution or
*$4500 annual contribution (savings of $1500 if paid annually)

(The above amounts could be increased or tiered contribution levels could be offered.)

The initial monthly contribution of $500 paid to DAO Consultants via a fiscal sponsor would include:
*Initial one-on-one consultation (four hours worth) about possible use of an Aragon DAO
*assistance with onboarding and implementing an Aragon DAO, including basic technical assistance

Out of this $500 collected, $350 would be paid to the actual DAO consultant(s) who do the work.

In addition, if contributors contribute on a monthly or annual basis, they would be entitled to participate in public speaking and networking opportunities and an online forum for sharing ideas, and receive a 30% discount off Aragon premium publications, events, conferences, and virtual exhibitions, etc.

Note that Aragon will always have a rich repository of free information and open-source tools available to the public.

If a contributor requires more than four hours of consultation, then the contributor (could be a project, corporate entity, or individual) has the option of executing a consulting agreement with an individual DAO consultant directly (now that they know each other). DAO Consultants could provide lawyer-approved consulting agreement templates for this purpose.

If DAO Consultants takes off, then it could later form its own legal entity if desired or voted upon by members. Perhaps the state of DAOs could have evolved further by then and there could be other options available enabling DAOs to interface with the real world via fiat and other channels.

Before DAO Consultants achieves its own legal status, the fiscal sponsor would only be in charge of funds collection and disbursement, leaving all creative, administrative, and operational decisions in the hands of the DAO and its members.

What do you think? Happy to hear any countervailing points of view. :smiley:

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This seems really cool, but I think it’s something that an independent entity focused on consulting would be better suited to take on. Aragon needs to focus on product development and user onboarding. Fiscal sponsorships and premium publications and events are not part of our M.O.

That being said, Aragon could provide the decentralized infrastructure (DAOs) and dispute resolution (Court) for a team/project that wanted to do this. That would be ideal.

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What do you mean? Like an end-to-end solution?

Not an end-to-end solution. Someone else should figure that out. The Aragon Court, however, can help provide accountability and security to that process. So Aragon DAOs and the Court would be pieces of the puzzle, but not the entire thing.

I am coming from the other side - a long-term and active NP (http://neuralarchivesfoundation.org) with a number of projects / sub-projects that could probably each benefit from their own DAOs.

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This would suit my situation - if I can ever get to “consultant” status - donations to my existing NP would be tax-deductible (for Australian entities) - so I am thinking of doing work where the donation stays with my own NP - but I wonder if there is the possibility of the NP also being a disperser for other organisations but charging a fee as you mentioned?

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