Operating Agreement

An Operating Agreement is a formal, on-chain or off-chain document that codifies the governance structure, membership rights, and operational procedures of a Decentralized Autonomous Organization (DAO) or a Limited Liability Company (LLC) operating in the Web3 space. It functions as the entity's constitution, detailing how decisions are made, how tokens or shares confer voting power, how profits and losses are allocated, and the process for admitting or removing members. Unlike traditional corporate bylaws, a DAO's operating agreement is often enforced through smart contracts and transparent, on-chain voting mechanisms.

The agreement typically outlines key components such as the governance framework (e.g., token-weighted voting, quadratic voting, or multi-signature wallet requirements), contribution and profit-sharing rules, and dispute resolution procedures. For an LLC, it establishes the manager-managed or member-managed structure and limits member liability. In a DAO context, it defines the scope of proposals, voting thresholds (like quorum and majority requirements), and the treasury management process. This creates a clear accountability framework, protecting members and providing a legal basis for the entity's operations, which is crucial for interacting with traditional legal systems and service providers.

Drafting a robust Operating Agreement is critical for mitigating risks such as governance attacks, deadlocks, and legal ambiguity. It should address scenarios like a hard fork, the dissolution of the organization, and the intellectual property rights of contributions. While some agreements exist fully on-chain as executable code, many projects use a hybrid model with an off-chain legal document that references on-chain processes. This balance ensures both the immutability and transparency of blockchain governance and the necessary legal recognition in off-chain jurisdictions, providing a comprehensive foundation for sustainable decentralized operations.

An Operating Agreement is a foundational governance document that defines the rules, rights, and responsibilities for members of a limited liability company (LLC) or, by analogy, a decentralized autonomous organization (DAO). Its etymology stems from corporate and partnership law, where 'operating' refers to the day-to-day management and 'agreement' signifies the contractual nature binding the participants. In a blockchain context, this traditional legal instrument has been adapted into a smart contract-based constitution, often called a DAO Operating Agreement or DAO Constitution, which encodes governance logic directly on-chain.

The concept migrated from the off-chain, paper-based agreements of traditional LLCs to the on-chain, code-is-law paradigm with the rise of DAOs. Early DAOs like The DAO (2016) and later frameworks such as Aragon and MolochDAO formalized the translation of corporate bylaws into executable smart contract code. This evolution represents a shift from legal jurisdiction to cryptographic enforcement, where the agreement's terms are automatically executed by the protocol, reducing reliance on external legal systems for basic governance operations.

Key components borrowed from traditional law include provisions for member contributions, voting rights, profit/loss allocations, and procedures for adding or removing members. In a DAO, these are often manifested as token-weighted voting, proposal submission mechanisms, treasury management rules, and upgrade paths for the underlying smart contracts. The term's persistence highlights the continued need for a formal structure of operations, even in a decentralized setting, bridging the gap between established business lexicon and novel cryptographic organizations.

A DAO Operating Agreement is the core governance document that translates a DAO's on-chain code and social consensus into a formal legal structure. It functions as the constitution or bylaws for the organization, defining member rights, voting procedures, treasury management, and dispute resolution. Unlike a traditional corporate charter, it is designed to be crypto-native, explicitly referencing on-chain actions like token-based voting on a snapshot or the execution of transactions via a multisig wallet. Its primary purpose is to create a legal wrapper that recognizes the DAO as a formal entity, such as a Limited Liability Company (LLC), providing members with liability protection and the organization with the ability to enter into contracts, open bank accounts, and comply with tax obligations.

The agreement typically outlines several key operational mechanisms. It specifies membership criteria, often tied to token ownership, and details the voting power associated with those tokens. It establishes proposal processes, including submission requirements, discussion periods, quorum thresholds, and vote durations. Crucially, it defines treasury controls, setting rules for how funds are stored, accessed, and spent, often requiring multi-signature approval for transactions above a certain threshold. The document also covers amendment procedures for the agreement itself, intellectual property ownership of the DAO's creations, and protocols for dissolution or merger. By codifying these rules, the agreement reduces ambiguity and provides a clear framework for decentralized coordination.

In practice, the agreement bridges the gap between off-chain legal enforceability and on-chain execution. For example, a DAO might use an off-chain voting tool like Snapshot to gauge sentiment, but the binding execution of a funded proposal is authorized by the terms within the Operating Agreement and carried out by designated signers of the multisig. This creates a hybrid model where social consensus drives decisions, but legal accountability and final execution are managed through a defined, signatory-based process. Prominent examples include the Wyoming DAO LLC structure, where the state's legislation recognizes DAOs as distinct legal entities, and the use of Delaware-series LLCs by many U.S.-based DAOs to create separate legal entities for specific projects or subsidiaries under the main organization's umbrella.

Drafting a robust Operating Agreement requires careful consideration of jurisdictional laws, tax implications, and the DAO's specific governance model. Legal experts often recommend including fiduciary duty clauses for core contributors, indemnification provisions to protect members, and clear dispute resolution pathways, potentially involving arbitration. As regulatory landscapes evolve, these agreements are increasingly seen as essential for risk mitigation, protecting members from personal liability for the DAO's actions and providing a defensible legal standing in court. Ultimately, a well-crafted DAO Operating Agreement does not centralize control but rather provides the necessary legal infrastructure for sustainable and compliant decentralized operations.