Choosing a Business Entity Type

One aspect of forming a business has been weighing on my mind, and that's what type of business entity to form. I'm rather wary of government and want to make sure everything I do is by the rules so I don't regret it later. But even the most friendly of state governments do not make it easy to find out what you should do.

The first step is to decide what type of business entity you want to form. A few resources I've found are fairly good at spelling out the difference between the various options:
http://www.expertlaw.com/library/business/business_form.html
http://www.medlawplus.com/library/legal/businessentitychoice.htm
and, of course, the IRS...
http://www.irs.gov/businesses/small/article/0,,id=98359,00.html

The easiest to get into is the Sole Proprietorship, of course. Very little is needed to start such a business. In my state you file a $25 "Doing Business As" form and you're on your way. My main concern is that the business does not automatically pass to my wife if I die. The other is that if someone sues me successfully they can take everything I own, whether it's related to the business or not. There isn't much protection under the law.

A Limited Liability Company would be the next, most obvious choice. But that gets a bit more expensive and complicated. In my state it's $100 to file, plus I have to draft an Operating Agreement, which could easily mean a trip to the lawyer. On the up side, my family and I would be shielded from liability, it's easier to transfer membership and control, and taxes would still not be too complicated.

But it does sound complicated. I'm sure I could draft a decent Operating Agreement if I had someone else's to use as a model. But by the time I'm done, depending on how much I value my time, I may be better off just using MyNewCompany.com. They do all of that for you, if you're willing to pay. The most basic package is $180, and gets the job done. It may very well be worth it. Does anyone out there have experience with them?

So I guess the bottom line is this: Do I feel lucky? Chances are a sole proprietorship is all I'd really need. After all, you have to make money to pay taxes, right? But I'm big on risk management, and in a recent class I took they pointed out that one risk that should always be addressed is "What happens if I succeed beyond my wildest dreams?" Could I convert a sole proprietorship to an LLC or other business entity?

Perhaps if I'm that successful it wouldn't matter.