Incorporating, becoming a limited liability company (LLC) or obtaining a franchise all refer to the creation of a business entity which acts as a “legal person”. There are definite advantages to the creation of these entities like:

Protection of personal assets. Creating a legal business entity safeguards an individual’s personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the liabilities of a business such as loans, accounts payable, and legal judgments. In a corporation, however, stockholders, directors and officers typically are not liable for their company's debts and obligations. They are limited in liability to the amount they have invested in the corporation (e.g.: If $100 in stock was purchased, no more than $100 can be lost). Corporations and Limited Liability Companies (LLCs) may also hold personal assets like houses, cars or boats. If one is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of the owner of a corporation or LLC cannot seize the assets of the company, however, they can seize their ownership shares in the corporation, as that is considered a personal asset.

Transferable ownership. Ownership in a corporation or LLC is easily transferable to others, either in whole or in part. Some states' laws are particularly attractive to this end. For example, with a Delaware Corporation, the transfer of ownership in a corporation is not required to be filed or recorded.

Retirement funds. Retirement funds and qualified retirement plans (like 401ks) may be set up more easily with a corporation. Corporations can also fully deduct the cost of paying its owner's health insurance.

Taxation. In the United States, corporations are taxed at a lower rate than individuals. Also, they can own shares in other corporations and receive corporate dividends 80% tax-free. There are no limits on the amount of losses a corporation may carry forward to subsequent tax years. A sole proprietorship, on the other hand, cannot claim a capital loss greater than $3,000 unless the owner has offsetting capital gains.

Raising funds through sale of stock. Capital from investors can be raised for corporations easily through the sale of stock.

Durability. A corporation is capable of continuing indefinitely. Its existence is not affected by the death of shareholders, directors, or officers of the corporation.

Credit rating. Regardless of an owner's personal credit scores, corporations acquire their own credit rating, and build a separate credit history by applying for and using corporate credit.

Incorporating

Forming a corporation begins with the selection of a corporate name. A corporate name is generally made up of 3 parts: "Distinctive element", "Descriptive element", and a legal ending. All corporations MUST have a distinctive element and a legal ending to their names. Some corporations choose not to have a descriptive element. In the name "Tiger Computers Inc." the word "Tiger" is the distinctive element; the word "Computers" is the descriptive element; and the "Inc." is the legal ending. The legal ending indicates that it is in fact a legal corporation and not just a business registration or partnership. You can choose from the following words: Incorporated, Limited and Corporation, or their respective abbreviations: Inc., Ltd. and Corp.

Once you have selected your corporation’s name, you are ready to incorporate. Incorporation beings with filing Articles of Incorporation (also called a Charter, Certificate of Incorporation or Letters Patent). The first step is to check with your state's corporate filing office (usually either the Secretary of State or Corporations Commissioner) and federal and state trademark registers to be sure the name you want to use is available. You then fill out a preprinted form (available from commercial publishers or your state's corporate filing office) listing the purpose of your corporation, its principal place of business and the number and type of shares of stock. You'll file these documents with the appropriate office, along with a registration fee which will usually be between $200 and $1,000, depending on the state.

You'll also need to complete (but not file) Corporate Bylaws. These will outline a number of important corporate housekeeping details such as when annual shareholder meetings will be held, who can vote and the manner in which shareholders will be notified if there is need for an additional "special" meeting.

Reporting after incorporation

Assuming your corporation has not sold stock to the public, conducting corporate business is remarkably straightforward and uncomplicated. Often it amounts to little more than recording key corporate decisions (for example, borrowing money or buying real estate) and holding an annual meeting. Even these formalities can often be done by written agreement and don't usually necessitate a face-to-face meeting.
You may also be required to file an annual report with the Secretary of State's office of the states you are incorporated and authorized to transact business in. Annual Report Requirements (due dates, information the Secretary of State requests, fees) vary from state to state.
For more information go to: http://en.wikipedia.org/wiki/Incorporation_%28business%29

Limited Liability Company (LLC)
The limited liability company form was introduced relatively recently to the United States, with the first statute adopted in Wyoming in 1978. An LLC provides limited liability to owners of its equity interest, similar to a corporation and certain limited liability partnerships, and in contrast to the personal liability for the debts and obligations of the business that are borne in the general partnership, joint venture or sole proprietorship.
A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers, physicians, or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC"). In most cases the PLLC is identical to a non-professional LLC except that there are additional rules related to professional regulation; the scope of those rules varies state to state. Although some people refer to an LLC as a "limited liability corporation", the correct terminology is "limited liability company". All states permit an LLC to be organized with a single member.
An LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. A perceived advantage of an LLC over a corporation or limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations or limited partnerships. Two examples of simplified requirements are: the lack of requirement for annual meetings of shareholders (LLCs have "members") and no requirement for written bylaws (LLCs have an operating agreement or regulations, but there is no requirement that they be in writing). As contrasted with a limited partnership, which require that the general partners be named in the certificate of limited partnership, the articles of organization of an LLC are not required to list the members or the managers. Most LLCs will, however, choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states, such as New York, require an operating agreement.
For purposes of U.S. tax law, a curious feature of the LLC is that an LLC can elect how it should be treated for federal and often for state income tax purposes. An LLC with one owner, for example, is treated as a sole proprietorship by default (when an LLC has a single owner - either an individual or an entity - it is a disregarded entity for federal tax purposes), but this one owner LLC can also elect to be treated as a C corporation or as an S corporation. Further, an LLC with more than one owner is treated as a partnership by default, but a multiple owner LLC can also elect to be treated as a C corporation or as an S corporation. To elect C corporation treatment, an LLC files a Form 8832 ([1]) with the IRS. To elect S corporation treatment, an LLC files a form 2553 ([2]) with the IRS.
One reason that a business might choose to be organized as an LLC is to avoid "double taxation". A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.
Another reason that a business might choose to be organized as an LLC is to exploit the tax classification flexibility that LLCs allow. A new business experiencing losses might choose to operate as a sole proprietorship or partnership in order to pass through those losses to the owners. A slightly more established business might operate as an S corporation to save on self-employment taxes. A large mature business with many owners might operate as a C corporation.

Series LLC

Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form a Series LLC, a.k.a. the "cell" LLC, if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each series member is also a founding member of the LLC.
When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Also, if a business owns real estate used in its operations, a Series LLC may avoid sales tax due on rent paid by the operating series to the real estate series. A Series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation with Q-subs.
The procedure for adding and deleting series is uncomplicated. Additional series can be added by simply amending the Series' “limited liability company agreement” (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by 2/3rd's approval of the ownership interests, or a simple majority if provided for in the operating agreement.
To minimize the chances of one series being held liable for another’s liabilities, the owners of a Delaware Series LLC should do the following[10]:

Keep the assets and operations of each series separate from the other series. Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.

Make sure each series is adequately capitalized.

Have each series files a fictitious business name statement in each county where it owns property. Each series should have its own name and the filing should emphasize the ownership of that series, for example, “Abracadabra LLC, Blackacre Series only”. This is to put creditors on notice.

All contracts, deeds, notes, etc. should be signed in the name of the series. Again, use something like “Abracadabra LLC, Blackacre Series only”.

A separate bank account should be maintained for each series.

Any loans between series should be properly documented.

Any transactions between series should be conducted in an arm’s length manner at fair market prices using appraisals.

LLC v. LLP

A limited liability company (LLC) differs from a limited liability partnership (LLP) in that the LLP is a partnership. LLP is a status elected by a partnership, a status that alters the rule of liability among the partners. The states have different rules on how the rule of partner liability is altered, so the state law in question must be examined.

Advantages of an LLC

No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).

No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).* Corporations are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death. Planning for the death of an owner of an LLC is rather more difficult.

Corporations can raise capital through stock sales.

Much less administrative paperwork and recordkeeping.

Pass-through taxation (i.e., no double taxation).

Limited liability (meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC).

Using default tax classification, profits taxed personally (at the member level, not at the LLC level).

Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S-Corp or corporation, providing much flexibility.

Can be set up with just one natural person involved (but then, single shareholder corporations are allowed in many states).

Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).

LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (See recent D.C. decisions).

Disadvantages of an LLC

Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors.

It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO.

The possible lack of any operating agreement requirement can cause problems

Some people, such as new businessmen, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.

For more information go to http://en.wikipedia.org/wiki/Limited_liability_company