First off, the disclosure: I'm not an attorney (nor do I play one on TV). This is not legal advice, just my opinion.
With that said, I would never enter into a partnership with anyone on a business venture (except maybe my wife!). LLC's are relatively easy to form and maintain, and not very expensive from an accounting standpoint (I think a non-complex LLC return might cost about $300-500, or so, here in NJ). You might want to use an attorney on your first one, but if you are on a budget, there are several credible internet services that do it for under $200 plus the filing fee. Just make sure you are following your state's guidelines.
By the way, Terms of Service are not enough to to protect you from a lawsuit... anyone can sue for anything. Even if you're innocent, you still have time and legal expenses.
From a credibility, liability and overall personal risk standpoint, the LLC is the way to go. Just my $0.02.
Best of luck! I had similar decisions on forming my web business. Once you do it, though, everything is easier the next time you are faced with a similar decision. That's what creates experience!