A buddy of mine and I started a web hosting company back in 2002 as a
side job.  We have grown since then and now have servers located in NJ
and clients from all over the world.  My friend is getting out of our
business and selling his "spot" to me.  It has pretty much been in his
name the entire time (bank account, merchant account, server loans,
etc.).

Before I take over, I want to make sure that everything is legal.  We
have not formed a business entity.  I would like to form an entity
(maybe LLC?) ASAP so that I can create a business checking account,
etc. and move everything into our hosting company name.  However, I
want to choose the right entity.  I want personal protection for my
home and family, but I also want to make the right decision in regards
to TAXES!

Our bank account is in Alabama, our servers are in NJ, and our support
team is outsourced.  Therefore, we don't have any "employees" other
than me, the new owner.  I live in Alabama.  We do not sell any
tangible goods ? everything is a service.  Hosting or domain name
registration.

PLEASE HELP!  I would like to contact an attorney and CPA, but I have
received some outrageous quotes!  I can file an LLC with the state of
Alabama for about $75 I believe.  However, I want to make sure that I
do all paperwork correctly and file everything that needs to be filed.
 I also want to make sure that I don't get slammed with more taxes
than needed because I chose the wrong entity.

After all bills, etc. per month.....we are only bringing in about $500
profit or so per month.  However, I expect that to grow a lot since I
will be devoting a lot of time to the company now.

What are other reputable hosting companies doing in regards to entities and taxes?

I guess we should definitely form an entity in the State of Alabama
and not somewhere like Nevada or Delaware?

I would also like someone to review our terms of service/agreement
sometime.  We got them from somewhere online and tailored them to our
company, but have never had someone review them to make sure that we
have everything needed.

Thanks for your time!