First thing first what to avoid doing !

Don’t use Link Farms A link farm is any group of web sites that all hyperlink to every other site in the group
Don’t link to sites that have more than 50 outbound links
Stay away from pages that are called “links”, “link pages” or any url that contains these words
Stay away from any sex related, gambling, and other unpleasant websites. ( Unless your business is related to one of these )
Three-way links they dont do you much good in the short term and no good in the long term.
Buying Links Google and other search engines don’t like paid links.

What is a Backlink?

#Backlinks, also known as incoming links, inbound links, inlinks, and inward links, are incoming links to a website or web page. In basic link terminology, a #backlink is any link received by a web node (web page, directory, website, or top level domain) from another web node.

Inbound links were originally important (prior to the emergence of search engines) as a primary means of web navigation; today, their significance lies in search engine optimization (SEO). The number of backlinks is one indication of the popularity or importance of that website or page (for example, this is used by Google to determine the PageRank of a webpage). Outside of SEO, the backlinks of a webpage may be of significant personal, cultural or semantic interest: they indicate who is paying attention to that page.

From Wikipedia

Anchor Text

When making backlinks use anchor text, this is the keyword a viewer would click on that contains your link. If you we’re for example selling Hair Accessories you would use :

<a href=”http://www.hairboutique.com”>Hair Accessories</a>

Building Genuine Backlinks

Article Directories

Free article submissions to directories and content providers, article marketing, submissions of press releases and other forms of content distribution are a means of getting them. One of the most popular ways to get relevant backlinks is to write and submit articles to the major article directories. Although the process of creating 100’s of articles may be daunting and time consuming, you can get a good amount of backlinks with a well written article. But make sure you optimize your article around the keywords you want to rank for. I would recommend you submit your article to at least 3 different article submission sites like Ezine, Goarticles and Hubpages.

Forum & Blog Comments

Blog & forum commenting is a great way to gain quality backlinks. Not only will you get a link, but you can gain good exposure to your website. Forum posting is the process of commenting on or creating new discussions (threads) on forums to get backlinks. That is what it originally was used for, anyway. You get backlinks from the links at the end of your posts called signature links, posting is very easy but make sure you are not just spamming, answer genuine questions with detailed answers! However, forum comments are not the best ones for the search engines, they know its easy and rank accordingly but if you are replying with knowledge you are getting great exposure and building trust relationships.

Press Release

The true value of a press release is in its news-worthiness. If your PR is just thinly veiled advertising, its not going to be worth much. If your PR is exciting and new, it can go viral and a press release service can help with the first steps to getting it there, if done correctly you can get instant relevant backlinks. Google loves press releases because they are the epitome of white hat SEO, have a look at http://www.helpareporter.com/ & http://www.prweb.com/

Guest Blogging

Google set up Author Rank to encourage content creators and bloggers to publish insightful, relevant, and regular content write quality, insightful, opinionated, and timely content and do this to share experience, thoughts, and knowledge and use your Anchor text to link back focusing on relevant keywords.

Contest

A great way to both spread your name as well as build quality backlinks to your website or blog is to hold a contest. You can do this by asking the readers that are interested to write about your contest in their blog. You can also submit your information regarding your contest to websites and blogs that follow contests, OR they have to subscribe to your feeds in order to participate.And the prizes can vary from themes to free advertisements to Cash money. You can also approach products maker in your niche and ask them to sponsor your contest.