LLC - How?

[Fred Ramos]

Hello ladies and gentlemen. We (Wife & I) have been investing (to hold) for just over a year and have been fortunate enough to acquire 3 SFR's so far. we acquired all 3 with the standard 20% down and conventional mortgages. Currently we are looking at making sure to protect our assets in the event a tenant gets hurt or something catastrophic happens.
The questions I have are:
1. Do the properties have to be free and clear in order to transfer them into an LLC?
2. We live in a state with no income tax but purchased our property in another state that does have an income tax. which state should we form the LLC in?
Also, we are open to suggestions as to what type of entity form. any and all ideas you all may have would be greatly appreciated.

Thanks a bunch.