It happens at least once a week on one of the lists I'm on: a message comes through that reads something to the effect of "I've just finished my latest fic; who wants to beta-read?" Heaven knows I've even sent a few of those messages myself. The only problem with this method is that you don't know who's going to volunteer. And judging from the amount of bad fic with potential that's out there, I'd say a lot of people either aren't getting very good beta-readers or, (gasp!), aren't having their stories beta-read at all.
Why does an author want to have his/her work beta-read, that is, have someone give the piece a good once-over before releasing the story to the general public? Well, there's always the boon of having one's ego stroked. Let's face it; beta-readers are fellow fans, and unless your work blows big time, they're going to have something nice to say about it. But the real reason you should have your work beta-read is to make sure it's the best it can be. The more eyes you've got checking a story, the better off you're going to be because no matter how good of a proof-reader you are, you ARE going to miss something when it comes to your own work. Why? Because you know how it should be and your brain is going to make the corrections.
Why be a beta-reader then? Well, there's the perk of getting to read a brand-spankin' new fic, which there is always a high demand for. You'll be helping friends in fandom (united we stand...well, you know the rest). And, most importantly, you'll be helping make that story the best it can be. Notice that this is also the most important reason for having a work beta-read. It's no coincidence. The fact of the matter is, for every ten fics out there, nine of them suck. And I, like many people I know, hate wading through ten crappy stories just to find one good one.
So what makes a good beta-reader? What should an author look for in one? Most importantly, you want somebody who's willing to get into minutia; someone who's willing to pick the story apart and tell you everything that's good and bad about it. Nothing frustrates me more than sending my story off to somebody, only to get this kind of response: "I luuuuuuuuved it! Don't change a word!" Wha??? First off, even masterpieces can stand to be tweaked. Secondly, I poured my heart and soul into this, and you didn't even take the time to read it critically? If you get a beta-reader that does this, chances are they were only after a free peek and you'd be best to not send them anything again. Also, it's usually not the best idea to send stuff to people you've never heard of. Nothing brings lurkers out of the woodwork like the words "Beta-readers needed!" Personally, I prefer to send to other authors. There are a couple reasons for this, probably the biggest being that they've lived through the process themselves, and they know you're after more than just a pat on the back. After a few stories, you'll figure out who helps you and who doesn't, and you probably won't have to ask for beta-readers anymore; you'll just send it to those select few.
Does that mean you have to be an author to be a good beta-reader? Not necessarily; it just means you may not instinctively know what to look for. But the good news is, it's not a hard thing to learn.
Here's what I want my beta readers to do for me. As for how you get this information to the author is really between you and her; I prefer to have my beta-readers make comments and suggestions right in the body of the story in different colors, fonts, etc. but you do what makes the most sense to you and your author.
Spelling, Grammar, Usage
This is probably the biggest thing. I don't care how good an author's ideas are; if the story is riddled with misspellings, incorrect verb tenses and apostrophes that aren't supposed to be there, it's going to be bad. When I beta a story, I always go through it at least twice, and this is basically all I look for the first time (and then the second time I can double-check myself). If this not your strong suit, here are some major red flags to watch for (and some of my biggest pet peeves).
Spelling - Chances are the story's already been spell-checked when you get it, but run one anyway, just in case. Double check all the proper nouns that the spell check won't catch and always keep in mind that spell check isn't fool-proof; if it's a word, it's going to get through. Just make sure it's the right word!
Grammar - Short of giving you a refresher English course, there's not much I can tell you about this other than it's important. If you're not sure about a passage, read it out loud exactly the way it's written. Ifit sounds wrong, it probably is. That being said, I will point out the biggest mistake I see made in this area: tense. In short, pick one and go with it. Most stories are written in past tense, though I'm seeing more and more in present. It doesn't really matter as long as you keep the same one throughout the story, or at least the section. I've seen too many stories that mix past and present tense, and that comes out sounding very clumsy.
Usage - This is the place where the most mistakes slip through. Usage mostly has to do with homophones (those are words that sound the same but are spelled differently, remember? :) ). This is something you basically just have to be good at, but I'll point out some of the biggest problems I've seen.
You're vs. Your- This is THE biggest mistake I see made. Your is the possessive form of you (What is your favorite fic?). You're is the contraction for you are (You're going to be a better beta-reader after reading this.). If you're unsure, take the word you're (or your) out of the sentence and replace it with you are. If it doesn't make sense, chances are you need your.
Two, too, and to - Two is, of course, the number 2. I rarely see this mistake. It's the other two that are constantly misused. To is an adverb - it's used in conjunction with a verb to indicate what the action of that word is. Basically, think of it as an arrow pointing direction (Are you going to MWCon this year?). Too is also an adverb, but it means also, very, or excessively (I see too many mistakes in fic up on the web!). If you can't rewrite the sentence with one of the above words and have it mean the same thing (I see an excessive amount of mistakes...) it needs to be to. But makes sure you try this test on sentences with to in them as well, because the majority of mistakes I see on this are using to when too should have been used.
A lot - is two words. Not alot. A lot.
There, they're, and their - Another triple threat! But this one's easy. There is a place (over there). They're is the contraction for they are (They're going to MWCon without me!). Their is the possessive form of they (their website).
Possessives vs. contractions vs. plurals (aka: Does this need an s or an 's?) - Nothing gets under my skin more than an apostrophe where it isn't supposed to be (or when there isn't one when there should be). Here's the rule: with nouns, you (in general; there a few exceptions to this rule,like goose into geese) just add an s (or an es if the word ends in a vowel) for a plural (more than one) and an apostrophe s ('s) for both possessives (belonging to the noun) and contractions that use the word is (noun's = noun is). But for pronouns (words that stand for nouns, you know, he, she, it...), it's different. The rule still applies for the contractions, but pronouns are already in the possessive form, so they don't need apostrophes to make them possessive. It's and its are not the same. It's = it is, while its means belonging to it. To pluralize pronouns, you need a different word entirely (usually some form of they).
Plot Holes - This is probably the thing I rely most on my beta-readers for. Does everything make sense, or did I leave out some important details that, while clear in my mind, are lost on the reader? Or, have I contradicted myself in some way? A good, tight story has no loose ends.
Flow - This is another thing I rely pretty heavily on my beta-readers to check. The flow of a story has to do with how smoothly the story reads. Is the word order correct? Are certain words used too much? Is the prose clumsy, or does one word flow easily into the next? I think flow is what separates the simply good writers from the great ones; great stories practically read themselves.
Characterization - Here's the one place where it's kind of hard to be objective, but I think it's important to point out to an author if she's having the characters do or say things that don't ring true. Threepio shouldn't be cracking jokes, for instance. Encourage the author to get inside the character's head and explain why he/she/it is acting that way. But tread carefully; if something is well backed up and you still don't like it, you may just have to agree to disagree. Don't ever forget that this is the author's creation; you're just trying to help her improve herself.
Authors, on the same hand, don't be afraid to disagree with your beta readers when it comes to plot suggestions, characterization, etc.. I generally only take about 50% of my beta readers suggestions.
I hope these pointers help all you aspiring writers and potential beta readers out there. Believe me, everything can stand to be improved. I re-read stuff I've had printed in zines that were edited and re-edited and re-re-edited, and I still find things that could be improved. Just don't be afraid to be critical, and never stop demanding more from your author, or, if you are the author, of yourself.