Let me start by saying that I am not a lawyer nor do I play one on TV. That said....

1. I doubt that the client has said "you must incorporate." On the other hand, there are plenty of clients who have said or require...
--a condition of doing business with is us that you take payment by credit card: we will ONLY pay by credit card.
--you must have business liability insurance (which in some states or depending upon the type of insurance effectively requires incorporation)
--you must sign a waiver indemnifying us from any possible damages.

And a lot of that stuff is hard or impossible if you're a S-P.

2. I think the answer to your question (LLC or Corp) depends upon a couple of things:
--what state are you in (I've been a C-corp in the past, now I'm an LLC, when I formed the LLC not all states recognized LLC's and the benefits from state to state varied)?
--how do you want to pay yourself or what benefits do you want (though increasingly the benefits between an LLC and Corp are diminishing)?
--do you want to work in other states? If so, being a incorporated is probably easier.
--why is your client requiring this? For instance, if it's about insurance (a certain kind you need to carry) then contact an agent and find out what structure is necessary for that insurance.

I suspect (without knowing your client or the state you're in), that incorporating will be more expensive than becoming an LLC.

As for the argument about not "caving" to the client, here's the deal: you go into business. Clients make certain demands. Those demands could be "this work MUST be onsite in Newark" or "you must use red binders for the report." You decide what type of work you want to do and what demands make sense for you. It's not about "caving" and it's not even about "random requirements." Clients have their own reasons. We may think they're stupid but that's irrelevant--it's their reason. So just like a demand that "the training can only be one day--not two" or "you need to interview EVERYONE in the department, not just the 8 people you picked out" you get to decide if you want to do business with them. It's not about "caving" just making a decision about how much the business means to you.

I suggest you take a look at Elaine Biech's book "The Consultant's Legal Guide." It will give you a much better feel for what kind of legal issues you might want to be considering and which format might be more helpful (or if it matters at all).

Most consultants I know made a decision to be either an S corporation or an LLC. In an S corporation the profits and losses are passed on directly to you rather than after paying corporate tax.

In one project with a Fortune 50 company, they required that you were either a corporation or you billed through a third party that treated you as a W2 employee. The third party was their intermediate for all consulting.

Thank you all for your information. This client is my largest and I do not want to walk away from this business. They currently pay me through a 3rd party as an independent consultant, but the 3rd party contract is expiring. They now have to pay me directly and this company has loads of rules about working directly with independents (regardless of the fact that I already carry all the required liability insurance).

Although they can not legally require me to incorporate, they can give the business away to someone who is! That said, I think I'm marching down the LLC path. It's just me, myself and I, so I think this is most like being a sole-proprietor and seems pretty simple.

Again, thanks for the insight. I'll check back in case anyone has additional tips.

After nearly 10 years as a sole proprietor I transitioned to an LLC last year. It was easy and The main reason was to protect my personal assets. Many contracts are templates and your client may not be aware what is in it. Ask to discuss and remove the parts that do not apply to your business with them.

Be sure to remove "work for hire" so that you can retain the rights to your intellectual capital.