Robert's given you some good thoughts.
With the same disclaimer, that this should not be construed to be legal advice, I'll add a tweak and an underscored endorsement:
Re incorporating, a tweak:
Many types of incorporated entities, on the other hand, are taxed twice on their profits: once on the corporation's (taxable) income and again on the personal income taxes of the owners when they receive the company's profits in the form of dividends.
A "subchapter S" corporation is a corporation that can act like a sole proprietorship (or partnership) for tax purposes--permitting the business profits and losses to "flow through" to the owner's or owners' individual income taxes, thus avoiding the double income taxation issue. On the other hand, depending on local law, sometimes LLC's and S-corporations, unlike sole proprietorships, may have additional tax burdens unrelated to income tax--e.g. a yearly filing fee of several hundred dollars for a business property tax. And while I believe Robert's point about liability is true when it comes to professional liability, such as attorney or medical malpractice, I believe having corporate status or the status of a limited liability company or limited liability partnership can protect owners' personal assets from normal liability for negligence.
For general information on starting a business, you might try looking at Nolo Press' book on the subject. Generally, their legal guides tend to be legally well-researched as well as well written for the layman. http://www.nolo.com/products/legal-guide-for-starting-and-running-a-small-business-RUNS.html
The biggest risk for a well-intentioned but underinformed new business that comes to my mind is that associated with trademark infringement. If a sole proprietor (or a corporation) starts doing business under a trade name that is already the trademark of another business, and such usage is likely to cause confusion for consumers, this has the potential to invite legal action.
You've now heard this from myself, Artchain, and Robert K.S. This is a biggie. One of the most common problems I saw in my trademark practice was businesses who chose and registered a business name and invested in it, only to find several years down the road when their business had grown that another competing business already had dibs on its use as a trademark.
Your state does NOT do a trademark search for you when they register your business name. They just check to make sure there isn't an identical one within your state. Similar story with domain names. Although here they look beyond your state, they're still essentially just checking to make sure no one has the exact same domain.
In each case the powers that be want to make sure no one has an IDENTICAL one, so that mail (and particularly any legal summons) gets delivered to the right doorstep, and a url with a particular domain only leads to a site of that domain owner.
TRADEMARK LAW, by contrast, is concerned with consumers and how they interact with marketing and involves a much more sophisticated analysis than just seeing whether the names are the same. Completely different words can conflict, if they have the same or similar meaning--or sound similar--or look similar. I can't stress this enough: before investing further, get your chosen name checked out, even if you've already paid for the domain or registered the name.
Especially if you're going as a sole proprietor, you don't want your personal assets on the line in defending a trademark suit because you didn't bother to take the time to do a proper search.