I set up a S Corp with 3 friends last year. Each of us were "issued" 250/1000 shares. However, none of us paid for these shares. My friends decided to pull out from this business and I will take over everything. In terms of the shares, how should I put it in the Corporate Minutes? Can I say that all original shares are cancelled due to nonpayment, and then issue new shares that will be purchased (and paid) for by me? Since I don't have that much money to pay for all the shares at the original share price, can I lower the price of each share when I issue the new one?
No par value stock (which is the norm) requires a minimal value. You can just say "cancelled" or cancelled for non-payment. Whatever shares remain (your 250) are 100% of ownership. Not all authorized shares need to be issued.
You probably want to start a relationship with a CPA and attorney to grow with you and you company.
Mr. Doland offers good advice. You may also want to get a document from the two shareholders that make it clear that they are turning the shares back in and that to the extent they may have any ownership interest in the corporation or held any office, they assign that interest back to the entity and have resigned all positions. A business attorney can prepare the kind of document it would be good for them to sign, so that there is no question later when you become successful. Good luck.
You'll want a buy out agreement or cancellation of shares agreement with the other co-owners to avoid any conflict in the future, even if they haven't made a contribution of money for those shares. They may still claim ownership of the shares as compensation for their work for the corporation.
It sounds like you need to consult with a local business attorney to get this matter all cleaned up. I suspect none of the corporation's authorized stock has been issued properly. See e.g., California Corporations Code section 25102(f).
Also, see California Corporations Code section 409 for proper consideration for stock issuance. For example, stock may be issued for money, rendered services, property (including intangibles), and secured promissory notes; however, stock may NOT be issued for unsecured promissory notes nor for promises of future services - because in part that would give creditors a false idea of capitalization of the corporation. So if any of you three "shareholders" have performed services for the corporation, any of you might make some claim to shares.
In sum:
1) Learn how to properly issue stock, including consideration, documentation, and compliance.
2) Learn how to properly document this matter and its resolution in your board's minutes.
3) Put agreements in place with former shareholders to mitigate against any future claims.
The facts that you have presented and applicable law appear not to be meshing properly.
The process by which corporate shares are issued is described in the post at the link provided below. Simplifying for the purposes of this answer:
- The board authorizes issuance of shares for specified consideration.
- The consideration is paid.
- The shares are issued.
Based on the facts provided, I suspect that none of the foregoing steps was taken - i.e., the shares were never issued, thus there is nothing to cancel.
You probably can issue shares, now, at a lower per-share price, but a lawyer would need to examine the corporation's formation-related documents to answer with certainty.
You should retain an experienced business lawyer to help you do things correctly this time.
