I agree about visiting the CPA! Here are a few quick comments, though.

1. One way or another, I think you need a local business license.

2. If the business operates under a name other than its legal name (your
name if sole proprietorship, corporation name if corporation), you need to
file a fictitious business name statement (at least in California) with
the county.

3. If a sole proprietorship, business income and expenses are reported on
IRS 1040 schedule C. California has a similar schedule.

4. Profit out of the sole proprietorship, whether taken out or not, is
taxable income to the proprietor.

5. Since employers make contributions to social security on your behalf,
you, as a sole proprietor, also need to make this payment. This is, I
believe, the "self employment tax."

6. Corporations pay taxes on their profits, whether distributed to their
shareholders or not. When corporate profits ARE distributed to
shareholders, they also pay income tax on the money they got. Some say,
therefore, that corporate profits are "double taxed," once at the
corporate level, again at the personal level.

7. Small corporations can be "subchapter S" corporations as far as the IRS
is concerned. As I recall, California does not have a similar provision.
For the IRS, a subchapter S corporation pays no taxes. Instead, the
shareholders pay personal income tax on their share of the profits,
whether distributed to them or whether they stay in the corporation. If a
subchapter S corporation has losses, the individual shareholder can take
that loss. If the subchapter S corporation has income, the shareholder
pays taxes on that income. In this way, a subchapter S corporation is
treated like a partnership.

So, there are a few comments. The IRS has LOTS of publications on small
businesses. You might want to read those, then see that CPA!

Harold

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