diff --git a/src/basic_memory/models.py b/src/basic_memory/models.py
index 34967a40..53ad0d8c 100644
--- a/src/basic_memory/models.py
+++ b/src/basic_memory/models.py
@@ -1,11 +1,29 @@
 from datetime import datetime, UTC
-from typing import List
-from sqlalchemy import String, DateTime, ForeignKey, Text
+from typing import List, Optional
+from sqlalchemy import String, DateTime, ForeignKey, Text, TypeDecorator
 from sqlalchemy.orm import Mapped, mapped_column, relationship, DeclarativeBase
 from sqlalchemy.ext.asyncio import AsyncAttrs
 
 
-def utc_now():
+class UTCDateTime(TypeDecorator):
+    """Automatically handle UTC timezone for datetime columns"""
+    impl = DateTime
+    cache_ok = True
+
+    def process_bind_param(self, value: Optional[datetime], dialect):
+        if value is not None:
+            if value.tzinfo is None:
+                return value.replace(tzinfo=UTC)
+            return value
+        return value
+
+    def process_result_value(self, value: Optional[datetime], dialect):
+        if value is not None:
+            return value.replace(tzinfo=UTC)
+        return value
+
+
+def utc_now() -> datetime:
     """Helper to get current UTC time"""
     return datetime.now(UTC)
 
@@ -36,10 +54,10 @@ class Entity(Base):
     description: Mapped[str] = mapped_column(Text, nullable=False, default="")
     references: Mapped[str] = mapped_column(Text, nullable=False, default="")
     created_at: Mapped[datetime] = mapped_column(
-        DateTime(timezone=True), default=utc_now
+        UTCDateTime, default=utc_now
     )
     updated_at: Mapped[datetime] = mapped_column(
-        DateTime(timezone=True),
+        UTCDateTime,
         default=utc_now,
         onupdate=utc_now
     )
@@ -82,7 +100,7 @@ class Observation(Base):
     )
     content: Mapped[str] = mapped_column(String)
     created_at: Mapped[datetime] = mapped_column(
-        DateTime(timezone=True),
+        UTCDateTime,
         default=utc_now
     )
     context: Mapped[str | None] = mapped_column(String, nullable=True)
@@ -114,7 +132,7 @@ class Relation(Base):
     )
     relation_type: Mapped[str] = mapped_column(String)
     created_at: Mapped[datetime] = mapped_column(
-        DateTime(timezone=True),
+        UTCDateTime,
         default=utc_now
     )
     context: Mapped[str | None] = mapped_column(String, nullable=True)
diff --git a/src/basic_memory/service.py b/src/basic_memory/service.py
new file mode 100644
index 00000000..76138eb6
--- /dev/null
+++ b/src/basic_memory/service.py
@@ -0,0 +1,200 @@
+from datetime import datetime, UTC
+from pathlib import Path
+from typing import List, Optional, Tuple, Dict
+from uuid import uuid4
+import shutil
+
+from sqlalchemy.ext.asyncio import AsyncSession
+from basic_memory.db import get_sessionmaker
+from basic_memory.models import Entity, Observation, Relation
+from basic_memory.repository import EntityRepository, ObservationRepository, RelationRepository
+
+class MemoryServiceError(Exception):
+    """Base exception for memory service errors"""
+    pass
+
+class FileOperationError(MemoryServiceError):
+    """Raised when file operations fail"""
+    pass
+
+class DatabaseSyncError(MemoryServiceError):
+    """Raised when database sync fails - indicates reindex may be needed"""
+    pass
+
+class EntityNotFoundError(MemoryServiceError):
+    """Raised when an entity cannot be found in the filesystem"""
+    pass
+
+class MemoryService:
+    """
+    Core service layer for basic-memory.
+    
+    Implementation follows "filesystem is source of truth" principle:
+    1. Write to filesystem first
+    2. Update database indexes second
+    3. Database is treated as disposable/rebuild-able index
+    """
+
+    def __init__(self, project_name: str):
+        self.project_name = project_name
+        self.session_maker = get_sessionmaker()
+        self.project_path = Path.home() / ".basic-memory" / "projects" / project_name
+        
+    async def initialize_project(self):
+        """
+        Initialize project directory structure.
+        Called when creating a new project or ensuring structure exists.
+        """
+        try:
+            (self.project_path / "entities").mkdir(parents=True, exist_ok=True)
+            # Add other directories as needed (e.g., for attachments)
+        except Exception as e:
+            raise FileOperationError(f"Failed to initialize project structure: {str(e)}") from e
+
+    async def _get_repos(self) -> Tuple[EntityRepository, ObservationRepository, RelationRepository]:
+        """Get repository instances with a shared session"""
+        session = self.session_maker()
+        try:
+            return (
+                EntityRepository(session, Entity),
+                ObservationRepository(session, Observation),
+                RelationRepository(session, Relation)
+            )
+        except:
+            await session.close()
+            raise
+            
+    @staticmethod
+    def _generate_id(name: str) -> str:
+        """Generate timestamp-based ID for an entity"""
+        timestamp = datetime.now(UTC).strftime("%Y%m%d")
+        normalized_name = name.lower().replace(" ", "-")
+        return f"{timestamp}-{normalized_name}-{uuid4().hex[:8]}"
+
+    async def _write_entity_file(self, entity_data: dict) -> bool:
+        """Write entity to filesystem in Markdown format."""
+        try:
+            entity_path = self.project_path / "entities" / f"{entity_data['id']}.md"
+            entity_path.parent.mkdir(parents=True, exist_ok=True)
+            
+            # TODO: Replace with actual markdown formatting
+            content = f"# {entity_data['name']}\n\nStub content"
+            
+            # Write to temp file first, then rename for atomic operation
+            temp_path = entity_path.with_suffix('.tmp')
+            temp_path.write_text(content)
+            temp_path.rename(entity_path)
+            
+            return True
+        except Exception as e:
+            raise FileOperationError(f"Failed to write entity file: {str(e)}") from e
+
+    async def _read_entity_file(self, entity_id: str) -> Dict:
+        """Read entity data from filesystem."""
+        try:
+            entity_path = self.project_path / "entities" / f"{entity_id}.md"
+            if not entity_path.exists():
+                raise EntityNotFoundError(f"Entity file not found: {entity_id}")
+            
+            # TODO: Implement actual markdown parsing
+            content = entity_path.read_text()
+            # Stub parsing
+            return {"id": entity_id, "content": content}
+        except EntityNotFoundError:
+            raise
+        except Exception as e:
+            raise FileOperationError(f"Failed to read entity file: {str(e)}") from e
+
+    async def _update_db_index(self, entity_data: dict) -> Entity:
+        """Update database index with entity data using upsert pattern."""
+        entity_repo, _, _ = await self._get_repos()
+        
+        try:
+            # TODO: Implement proper upsert logic
+            try:
+                return await entity_repo.create(entity_data)
+            except:
+                existing = await entity_repo.find_by_id(entity_data['id'])
+                if existing:
+                    return await entity_repo.update(entity_data['id'], entity_data)
+                raise
+        except Exception as e:
+            raise DatabaseSyncError(f"Failed to update database index: {str(e)}") from e
+
+    async def create_entity(self, name: str, type: str, context: Optional[str] = None) -> Entity:
+        """Create a new entity."""
+        entity_id = self._generate_id(name)
+        entity_data = {
+            "id": entity_id,
+            "name": name,
+            "entity_type": type,
+            "context": context,
+            "created_at": datetime.now(UTC)
+        }
+        
+        # Step 1: Write to filesystem (source of truth)
+        await self._write_entity_file(entity_data)
+        
+        # Step 2: Update database index (can be rebuilt if needed)
+        try:
+            return await self._update_db_index(entity_data)
+        except DatabaseSyncError as e:
+            print(f"Warning: Database sync failed, reindex may be needed: {str(e)}")
+            return Entity(**entity_data)
+
+    async def get_entity(self, entity_id: str) -> Entity:
+        """Get entity by ID, reading from filesystem first."""
+        # Read from filesystem (source of truth)
+        entity_data = await self._read_entity_file(entity_id)
+        
+        # Try to get from database for full object
+        try:
+            entity_repo, _, _ = await self._get_repos()
+            entity = await entity_repo.find_by_id(entity_id)
+            if entity is None:
+                # Reindex this entity if not in database
+                entity = await self._update_db_index(entity_data)
+            return entity
+        except DatabaseSyncError:
+            # Return basic entity from file data if DB fails
+            return Entity(**entity_data)
+
+    async def delete_entity(self, entity_id: str) -> bool:
+        """Delete entity from filesystem and database."""
+        try:
+            # Delete from filesystem first
+            entity_path = self.project_path / "entities" / f"{entity_id}.md"
+            if entity_path.exists():
+                entity_path.unlink()
+            
+            # Try to delete from database, but don't error if it fails
+            try:
+                entity_repo, _, _ = await self._get_repos()
+                await entity_repo.delete(entity_id)
+            except DatabaseSyncError:
+                pass  # Database cleanup can happen during reindex
+                
+            return True
+        except Exception as e:
+            raise FileOperationError(f"Failed to delete entity: {str(e)}") from e
+
+    async def rebuild_index(self) -> None:
+        """Rebuild database index from filesystem contents."""
+        try:
+            entities_dir = self.project_path / "entities"
+            if not entities_dir.exists():
+                return
+                
+            for entity_file in entities_dir.glob("*.md"):
+                try:
+                    entity_data = await self._read_entity_file(entity_file.stem)
+                    await self._update_db_index(entity_data)
+                except Exception as e:
+                    print(f"Warning: Failed to reindex {entity_file}: {str(e)}")
+        except Exception as e:
+            raise DatabaseSyncError(f"Failed to rebuild index: {str(e)}") from e
+
+    async def cleanup(self) -> None:
+        """Clean up resources."""
+        # Implementation depends on what needs cleanup
+        pass
\ No newline at end of file
diff --git a/tests/.coverage b/tests/.coverage
deleted file mode 100644
index 0fe772f5..00000000
Binary files a/tests/.coverage and /dev/null differ
diff --git a/tests/conftest.py b/tests/conftest.py
new file mode 100644
index 00000000..afdf5137
--- /dev/null
+++ b/tests/conftest.py
@@ -0,0 +1,45 @@
+import pytest
+import pytest_asyncio
+import tempfile
+from pathlib import Path
+
+from basic_memory.service import MemoryService
+from basic_memory.db import init_connection
+
+@pytest_asyncio.fixture
+async def memory_service():
+    """Fixture providing initialized MemoryService with temp directories."""
+    # Create temp directory that is cleaned up after the test
+    with tempfile.TemporaryDirectory() as temp_dir:
+        # Override project path
+        test_project_path = Path(temp_dir) / "test-project"
+        
+        # Initialize database connection
+        init_connection("test-project")
+        
+        # Initialize service with test configuration
+        service = MemoryService("test-project")
+        service.project_path = test_project_path
+        
+        # Initialize project structure
+        await service.initialize_project()
+        
+        yield service
+        
+        # Cleanup happens automatically when temp directory is removed
+
+@pytest.fixture
+def sample_entity_files(memory_service):
+    """Fixture providing sample markdown files."""
+    entity_dir = memory_service.project_path / "entities"
+    
+    # Create sample files
+    files = {
+        "test-entity-1": "# Test Entity 1\n\nContent",
+        "test-entity-2": "# Test Entity 2\n\nContent"
+    }
+    
+    for name, content in files.items():
+        (entity_dir / f"{name}.md").write_text(content)
+        
+    return files
\ No newline at end of file
diff --git a/tests/test_service_create.py b/tests/test_service_create.py
new file mode 100644
index 00000000..d5ff11ba
--- /dev/null
+++ b/tests/test_service_create.py
@@ -0,0 +1,98 @@
+import pytest
+from datetime import datetime
+from pathlib import Path
+
+from basic_memory.service import MemoryService, FileOperationError, DatabaseSyncError
+from basic_memory.models import Entity
+
+pytestmark = pytest.mark.asyncio
+
+
+# Happy Path Tests
+
+async def test_create_entity_success(memory_service):
+    """Test successful entity creation."""
+    # Act
+    entity = await memory_service.create_entity(
+        name="Test Entity",
+        type="test",
+        context="test context"
+    )
+    
+    # Assert
+    assert isinstance(entity, Entity)
+    assert entity.name == "Test Entity"
+    assert entity.entity_type == "test"
+    assert entity.context == "test context"
+    
+    # Verify file was created
+    entity_file = memory_service.project_path / "entities" / f"{entity.id}.md"
+    assert entity_file.exists()
+    content = entity_file.read_text()
+    assert "Test Entity" in content
+
+# Error Path Tests
+
+async def test_create_entity_file_error(memory_service, monkeypatch):
+    """Test handling of file write errors."""
+    # Arrange - make file write fail
+    async def mock_write_fail(*args, **kwargs):
+        raise FileOperationError("Mock file write error")
+    monkeypatch.setattr(memory_service, "_write_entity_file", mock_write_fail)
+    
+    # Act & Assert
+    with pytest.raises(FileOperationError):
+        await memory_service.create_entity(
+            name="Test Entity",
+            type="test"
+        )
+
+async def test_create_entity_db_error(memory_service, monkeypatch):
+    """Test handling of database errors."""
+    # Arrange - make db update fail but file write succeed
+    async def mock_db_fail(*args, **kwargs):
+        raise DatabaseSyncError("Mock DB error")
+    monkeypatch.setattr(memory_service, "_update_db_index", mock_db_fail)
+    
+    # Act
+    entity = await memory_service.create_entity(
+        name="Test Entity",
+        type="test"
+    )
+    
+    # Assert
+    assert isinstance(entity, Entity)  # Should still return entity from file
+    entity_file = memory_service.project_path / "entities" / f"{entity.id}.md"
+    assert entity_file.exists()  # File should still be created
+
+# Edge Cases
+
+async def test_create_entity_with_special_chars(memory_service):
+    """Test entity creation with special characters in name."""
+    name = "Test & Entity! With @ Special #Chars"
+    entity = await memory_service.create_entity(name=name, type="test")
+    
+    assert entity.name == name
+    entity_file = memory_service.project_path / "entities" / f"{entity.id}.md"
+    assert entity_file.exists()
+
+async def test_create_entity_atomic_file_write(memory_service):
+    """Test that file writing is atomic (uses temp file)."""
+    # Act
+    entity = await memory_service.create_entity(name="Test Entity", type="test")
+    
+    # Assert
+    temp_file = memory_service.project_path / "entities" / f"{entity.id}.md.tmp"
+    assert not temp_file.exists()  # Temp file should be cleaned up
+    
+    entity_file = memory_service.project_path / "entities" / f"{entity.id}.md"
+    assert entity_file.exists()  # Final file should exist
+
+# TODO: Add tests for:
+# - Concurrent operations
+# - System crash simulation
+# - Permission issues
+# - File system full scenario
+# - Long/unicode entity names
+# - Empty/whitespace names
+# - Other edge cases
\ No newline at end of file