It really depends on your end-goal for the enterprise. If you want it to be a lifestyle business that is closely held and has only a few owners (or just yourself), then you could do the LLC. But if you can imagine it growing beyond those limits, I'd suggest going S-Corporation to start with, and then later you can convert to C-Corporation when it becomes appropriate to do so. The LLC and S-Corp have the limited liability protection (as long as you follow the proper practices) that is lacking in a sole proprietorship. They both also avoid the double-taxation issue of C-Corporations because they are pass-through entities.
To my knowledge there is no legal requirement to buy insurance for an online anything except whatever might be imposed by your payment gateway... I'd be shocked if Indiana imposed something more, but you could contact the local Small Business Administration and they can likely get the question answered for you, or point to resources that would answer this. Again, I find it hard to believe that there is a legal requirement for this.