As soon as possible. If you are starting up a small business and plan to incorporate sooner or later, than it should be sooner. There are some pitfalls that you must watch out for if you do not incorporate early.
If there is more than one founder, you should definitely incorporate early. Partnerships are generally informal arrangements and this can harbor many misconceptions and therefore, disagreements. Incorporating the business will introduce formality, definitive roles and rights.
If there is any intellectual property created then it should be assigned to the corporation. IP assignment clauses should always be a part of incorporation documents in some form or another. Let us say two founders create some IP but never form a corporation or never assigned the IP rights to the corporation. If one partner/shareholder decides to leave, the corporation may be stuck without the right to use that IP of the founder.
If you plan to offer stock options as incentives to anyone, you are better off having a formed corporation to do so.
Liability. Corporations help protect your personal property in those situations where your whole net worth might be liable for a wrong that you committed, even accidentally.
Funding/further investments. It is much easier to obtain funding if in corporate form and ready to go. Investors are wary to invest in sole proprietorship’s and other forms of business. They are familiar with corporations and can easily do business with corporations.