LLC or S Corp: Which should I do, and where should I do it?

My current sole proprietorship develops websites. We are a Yahoo! Small Business Partner developing Yahoo! Stores and ecommerce solutions primarily. I want to get my business ready to pass on to my children or to sell if necessary, and think some form of incorporation would be a wise move. But what kind, and what US state is best to incorporate in? Is it true that just a mail drop and bank account in a given state is sufficient to incorporate or form an LLC there, or must your primary residence be there?

I’ll bounce all this off a knowledgeable attorney before I make a final move, but the more I already know from what other members of the collective can tell me, the more I can learn in short order when talking to a guy who bills three figures per hour for his time. :-)