My thoughts on this subject..
I know everyone is saying to skip the server/domain right now and i can see both the good and the bad on this.
The good: Saves money up front, can be simple for the person setting it up,
The bad: can cost more to switch over to a domain later, retrain employess where to get files/info, backup is a hassle, nothing centralized.
For what it is worth, I would go and grab a cheap dell or HP server and set it up right the first time, then you can always upgrade the hardware later if needed.
I know I have seen quotes for a server with backup, antivirus (for only 5 users you can use Norton Buiness pack), and a couple hard drives mirriored go out for as little as $3,000* and if you can find a place, grab a lease for 3 yrs so that it is a small monthly cost with a buy out or upgrade at the end.
For email /website it looks so un-professional to have a @hotmail, aol, or someother domain that is not yours. For $200 for 2 yrs, grab your domain @
www.ipowerweb.com. If you choose the 2 yr plan, you get your domain for free.
If he wants to hosts his own email with exchange, then go with MS Windows 2003 Small Business Server, it costs more upfront but includes the license for exchange with it. However, it has a 75 user max limit. If he really grows in the next 3 yrs, you may want to look at server standard and add exchange to it.
Like I said, just my thoughts.
* this also includes our time to install the server, YMMV.