Eddie and Barbara Smith are husband and wife. They are in the process of opening a coffee shop/wine bar in downtown Salt Lake City. They have scraped together $300,000 in cash to contribute to an entity which will own and operate the business in return for a 100% ownership interest in the entity. They are willing to risk the loss of that $300,000, but would like to make sure that their home and other assets are not at risk when customers over indulge in either the wine or the coffee. The coffee shop and wine bar will not qualify as either a professional or green entity.

This morning Mr. and Mrs. Smith arrived in your office at 9:00 a.m. to ask a simple question. What type of entity should they form and what type of tax return would that entity be required or allowed to file? You make the decision that the best way to proceed is for you to choose TWO possible forms of doing business that seem to best fit their situation. Then let Mr. and Mrs. Smith make the final decision. To help them decide you should explain the liability protection, available choices of what tax return to file, and the federal income tax treatment of income and expenses for each of your two favorite choices.