Legal Question in Business Law in California

Of course.

The big issue isn't whether it would make them an employee; it is whether you have to comply with securities laws for selling the shares. The rules for compensating employees with shares are looser than when you give them to a person who is essentially a creditor, in lieu of cash. In either case, however, you should never issue shares as payment to anyone without consulting an attorney to make sure you are in compliance with all applicable securities laws and regulations.

As a Franchise Attorney I basically agree with the other attorney answers and add the following. Any stock issuance, in addition to complying with applicable securities, must be approved by action of the Board of Directors. Typically this is a regular or special meeting of the board and documented by minutes. Consult with a good business or franchise attorney in your area for specific advice.

Mr. Franchise - Kevin B. Murphy, B.S., M.B.A., J.D.

Franchise Foundations, a Professional Corporation

If you follow proper corporate procedures on how and why it is done, you can issue shares to anyone you want.