need to form LLC for internet business?

*Not a lawyer or accountant so take things I say with a grain of salt*

When doing business, there are a variety of reasons to choose a particular legal structure for your business. Most people starting out just use their SSN and name and create an entire business around it. As the business grows, they need to consider corporate structure not only for legal protection, but also accounting purposes.

Legal
Risk Management and control has several parts to it. Part of it is Risk Avoidance (I just don't do something), Contractual risk transfer (I transfer the risk of privacy breaches to my hosted shopping cart), Legal Structure (I choose a legal structure that takes the brunt of risks in my business) and finally Risk Financing (also known as insurance).

Most people starting out are fine with running a sole proprietorship until they establish themselves enough to consider legal structures. If you are worried about getting sued, purchase yourself an umbrella policy for a couple hundred dollars a year.

Accounting
There are certain aspects to running your business where a legal structure makes sense. This includes having an easier time writing off business expenses, creating a separate account with government entities, etc. When you make enough, the type of legal structure you have can make a difference in things like self employment taxes. Your accountant can tell you.

Cost
Depending where you live, legal structure might make more sense. For example, here in Hawaii it is cheap and easy to start up a legal structure. Literally an LLC is $50 a year and the cost of your registered agent and a one time $20 excise tax license. California and NY might be significantly more expensive. Nevada you need to have a business license that runs $325 a year which can make it cost prohibitive. You also have to use a business checking account which tends to have monthly fees (cheap but ads up).

What legal structure
If you are not making money yet, if it was me, I would wait on the legal structure unless it is cheap (like here in Hawaii). I have a multi-member LLC but others have an S corp. You do not need a legal structure to set up bank accounts or supplier relationships. Many folks start out as sole proprietors with a Fictitious (DBA) business name.

LLC's are easier since you do not have to provide an annual report to the state like you do with corporations (both C and S). S corps provide you a variety of tax advantages.

Don't think that having an LLC actually protects you. If you have a single member LLC it provides (from my understanding - please any attorney's correct me if I am wrong) very little liability protection in the case of legal or financial judgements. Many times the courts have looked at single member LLC's and said, well its just you and have allowed the corporate veil to be pierced. I did my LLC with my sister as a 2% owner (they don't like your spouses being a member as well).

Again, this is something you need to talk to with both your accountant and a competent business attorney. If it was me, I would wait until I was actually making money before I started spending the money on setting up a legal entity. If you have a good financial advisor they probably have already told you to purchase an umbrella policy anyway.