I am interested in starting a company that makes software tools. I looked into incorporating and it looks like it will cost a few hundred dollars if I do everything myself.
From what little research I've done the main thing you get form incorporating is protection from a disgruntled customer suing you for your personal assets (house, personal bank account etc). Is this correct? Are there other benefits that incorporating affords you?
Correct, protection from personal liability is the primary benefit of incorporating. This benefit involves more than just customer lawsuits against you - just think about any other party you will be signing a contract with for your business: 1) Potential investors also want limited liability, 2) limited liability also protects your personal assets from certain employee-hire and independent contractor legal issues, and 3) issuing ownership shares via a corporation clearly delineate corporate assets from your personal assets. Be aware that it doesn't guarantee limited liability in 100% of situations (search "piercing the corporate veil") like fraud or negligence.
If you need any pointers for incorporating, here are some DIY guides: http://www.seravia.com/howtos/search Other reasons to incorporate:
-Tax benefits: Depending on the type of entity you choose and its associated form of taxation. Probably not noticeable until your startup generates revenue, scales, and hires employees... In the beginning, corporate and franchise taxes might bite more than your personal income tax.
-Accounting: Opening a separate bank account for your business can deal with a number of logistical and organizational issues, as well as valuation issues further down the line.
For other benefits (and disadvantages), see:
Another reason is investors generally like to invest in an incorporated company.