+1 to this advice. Don't incorporate until you're already paying yourself a good salary. The wrong structure can easily cost you thousands per year in taxes and fees.
No you simply convert the sole proprietorship to an LLC (or corporation). You "sell" your intellectual property to the newly created corporation in exchange for your founder stock. A sole proprietorship is sort of like the default business structure, you don't really need to do anything to start it, everything just ends up on your personal tax return.
"Piercing the corporate veil" is different. Google will be helpful if you're interested, but basically if you run a company don't do shady shit -- don't commit fraud or gross negligence, and respect the separation between company and personal finances. Otherwise you may lose the protection of the corporation (the "limited liability" part of LLC) and become personally liable if things go bad.
