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Before launching your Web3 project, there’s one critical question you need to answer:
What’s the best legal corporate structure for your business?
In a world where traditional business models often don’t apply, navigating the complexity of Web3 requires a savvy approach. With the industry still evolving and regulations changing by the day, choosing the right structure is essential. Wrong moves could mean wasted resources, compliance headaches, and even potential liabilities down the road.
The landscape is fast-moving, and what seemed like a favorable jurisdiction today could quickly become a barrier tomorrow. To avoid running into roadblocks, it’s crucial to set up a structure that not only meets current legal requirements but also positions your project to adapt as the space evolves.
In this article, we’ll dive into the most effective corporate structures for crypto projects and explore how the right choice can fuel growth, reduce risks, and set you up for success in a rapidly changing market.
Let’s get your foundation right from the start.
Why is building a legal structure so important?
Before breaking down the components of a typical corporate structure for Web3 projects, we will highlight the key reasons why your business should be properly structured from the outset.
Limitation of Liability
By setting up an entity, you can safeguard your personal assets in case the entity incurs debts or is facing a lawsuit. This means that the personal assets of shareholders are not at risk.
Tax Purposes
When it comes to taxes, it’s important to remember that different jurisdictions impose different tax liabilities. Additionally, the type of business entity you choose can also impact your taxes. For example, if you choose to form an LLC, the company will be taxed on its profits, while shareholders will only be taxed on the dividends they receive. However, if you operate as a sole proprietorship, you will be taxed on your business income as part of your personal income. By choosing the right structure for your business, you can optimize your tax liabilities.
Raising Capital
Structures such as holding companies or token issuers facilitate capital raising, whether by selling shares of stock or offering tokens to early supporters of your venture.
Legal Compliance
The variety and sometimes lack of regulations make having a proper corporate structure essential. Moreover, it is often challenging to structure your business within a single jurisdiction or under one entity.
Intellectual Property Protection
If a company has a significant intellectual property portfolio, it is advisable to keep it under a separate entity to shield it from any potential financial or operational risks that the operating company may encounter.
What is the best structure for a crypto startup?
When structuring your Web3 business, it’s important to keep in mind various factors, such as your business activities, the location of your target audience, token issuance and the way funds will be raised. Consequently, this will define your corporate structure.
Based on our experience, the most effective corporate structure for a Web3 project includes some or all of the following entities.
1. Holding Company: Protecting Your IP and Attracting Investors
The primary function of a holding company is to retain ownership of valuable assets (e.g. intellectual property rights), thus protecting these assets from potential risks associated with the operational aspects of the business. Therefore, for many Web3 projects, creating a holding company may be required.
In addition, a holding company is often used for raising funds. Typically, investors are more interested in buying equity in a holding company that has several subsidiaries than in an operating company. This provides exposure to multiple businesses, reducing investment risk. The performance of one subsidiary does not necessarily affect the entire portfolio, making it a safer investment option.
Finally, a holding company not only mitigates financial risks for investors but also safeguards all the business. In the event that one company encounters legal issues such as debts or lawsuits, it will not necessarily affect the other companies in the group. Moreover, if one subsidiary becomes insolvent, it does not pose a threat to the other companies in the portfolio.
Benefits:
Holding companies protect IP and allow you to structure your business cap table in a way that is attractive to investors. In our experience a common law jurisdiction is the best jurisdiction for HoldCo’s.
2. Development Company: Building the Core of Your Project
The development company is often the “engine” of a crypto project. This entity hires employees, manages contracts, and handles day-to-day business operations. The development companies are typically set up in a jurisdiction that makes it easy to hire talent, manage payroll, and operate efficiently.
Benefits:
The development companies are ideal for handling the operational side of a crypto project. While other structures presented in this article may not be required for certain projects, setting up a development company is a must, as this entity will be responsible for dealing with partners, signing contracts, opening bank accounts and paying taxes.
In our experience UAE is the best jurisdiction for DevCo’s / OpCo’s.
3. Token Issuer: Compliant Token Launch
For projects planning to issue tokens, a separate token issuer entity should be established. This entity handles the issuance, sale, and distribution of tokens. Token issuers must be based in jurisdictions that are legally compatible with token issuance to avoid regulatory issues down the line.
One of the reasons for having a separate entity for token issuance is that the rules and regulations governing token issuance and distribution are still evolving and vary significantly from one jurisdiction to another. You may find that the jurisdiction that best meets your business needs has not yet established regulations for token issuance or that existing regulations are complex and difficult to navigate. This variability can make it challenging to consolidate all activities under a single business entity. Therefore, having a separate company manage token issuance helps ensure clarity and adherence to the law.
Benefits:
Having a separate entity for the tokens can provide a layer of legal protection. In the event of any issues with the token, such as being classified as a security by regulators or facing security lapses, it will not have a direct impact on other companies in the group. This setup can also make it easier to establish clear reporting structures for token sales.
In our experience the best jurisdiction for a Token Issue is tax free and has a VASP regime that specifically allows token issuance.
4. DAO Legal Wrapper: Enabling Decentralized Governance
Decentralized Autonomous Organizations (DAOs) have become a popular option for Web3 projects that prioritize community governance. If you are launching a DAO, you may need a legal “wrapper” to represent the organization, especially if you prioritize separation of legal liability for the members.
The main reason to set up an entity for your DAO is to achieve legal legitimacy and interact with off-chain world, such as open a bank account, hire people and have a tax residency. Due to its decentralised nature DAOs are not recognised as legal entities in traditional legal systems. Hence, in order to stay compliant with existing laws, it is important to have a legal structure for your DAO.
Members’ liability is another critical aspect to consider. Without a legal entity, your DAO will be seen as a general partnership, which will make your founder, contributors and members vulnerable to potential liabilities if any legal disputes arise.
Benefits:
DAO legal wrappers allow decentralized communities to own assets, sign contracts, and interact with off-chain entities while remaining compliant with local laws. This structure makes it possible for DAOs to operate within traditional legal frameworks without exposing their members to potential legal risks.
5. Special Purpose Vehicle (SPV): Administering Specific Needs
The use of this legal structure is not mandatory, but it may be beneficial for projects with a particular purpose or linked to a specific location or type of asset. For instance, businesses dealing with real estate or precious metals might need to set up an SPV. This entity should be incorporated in the jurisdiction where the primary asset is located and may also be responsible for obtaining relevant licenses and permits, and complying with local regulations.
Benefits:
SPVs enable projects to meet specific objectives in jurisdictions where a particular license or asset is necessary. These entities are created to fulfill a defined purpose and comply with local regulations.
Key considerations when building a structure for your project
- Do you plan to issue tokens?
If your project includes token issuance, you will want to focus on jurisdictions that support this activity and it is recommended for it to be carried out under a separate entity. - Is your project community-driven?
If you intend to create a DAO and empower your community to determine the direction of your project, seek out locations that provide a legal framework for DAOs. - Do You Need to Protect Intellectual Property?
If protecting your intellectual property is a priority, consider establishing a holding company in a jurisdiction that places a high value on IP rights. - Are You Hiring a Team? If your project requires hiring, development companies can offer greater flexibility in recruitment and team management.
- Where Are Your Investors?
If you are raising funds from investors abroad, selecting a well-regarded jurisdiction for your holding company can increase your appeal and provide credibility.
Conclusion
Choosing the right corporate structure is not only important for legal protection; it is also a strategic decision that impacts your project’s growth, reputation, and compliance. A well-defined and appropriate structure can facilitate fundraising, simplify market entry, and minimize the risk of regulatory issues.
If you need help selecting the best structure, we’re here to guide you.
Contact us for a free consultation and let’s build your project on a solid foundation.