I forgot about another reason to form an LLC or corporation: Tax Audits. Here are some stats from 2004:
IRS Audit Rates
Sole Proprietors with income < $25k: 3.15%
Sole Proprietors with income $25-100k: 1.47%
S-Corporations (all): 0.19%
C-Corporations, assets under $250k – 0.18%
According to this small data set, sole props are 7 to 17 times more likely to be audited than corporations, and about 3 times more likely than indviduals without business income. Couldn’t find info for LLCs.