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Operating as an S corp would be a good choice. You get the benefits of limited liability but you are taxed as a sole proprietor. Once you incorporate you will have to get a federal tax id number. When you incorporate in CA you will also get a state registration number. If she sells products she will need a sales tax number. If she has to have a license to conduct her business she may need a license for the corporation but I am not sure of what she does.
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You can use Legal Zoom to form your corporation in CA. When you incorporate you will get a state registration number. You can get a tax ID number by going to irs.gov and do a search for the SS-4 form which is how you apply for a tax ID for your new corporation. You can do it online and get the ID number right away. As a booth renter you will not need a license for the business. If she ever goes out on her own she will need an establishment license but right now that is not necessary. Once she is incorporated she wants to make what is called a subchaper S election. You should be able to get the forms on Legal Zoom but if not you can get them on the irs.gov website - just search for sub chapter S form. You will also need to make a sub chapter S filing at the state level. That should be available at the state tax website.
If he has prepaid the rent and left the premises in good condition, then he should get his security deposit back since you have the rent through the end of the lease. AS long as he understands that the rest of the rent will be forfeit then he has met his obligation and is entitled to get his security deposit back as there were no damages or unpaid rent.