How would I best set things up so as to fully fund my and my employees healthcare and reduce taxable income. I am am considering forming an LLC or S-Corp but don't know the pros and cons in this aspect and other things needed to accomplish this.
The best option to achieve your goal would be to purchase health insurance for both you and your employee with the lowest possible deductible from a health insurance provider as an employee benefit through the company. Low deductible health plans have higher premiums but will leave less of the cost on the shoulders of the participants. You would then cover all the premiums as the employer and deduct them on your Schedule C or S Corp.
The manner of which the health insurance would be deducted differs based on whether you have a schedule C or an S Corp. S Corps require you to include the premiums as W2 wages for the owner (you) and then deduct them on your personal return subject to limitations. Schedule C's are simpler as you just classify the employee premiums as an employee benefit cost and deduct your insurance separately as SE health care premiums. Both of the methods end up with the same tax result - just different ways of getting there.
If you ever add on another employee, you would need to provide them with equivalent coverage. I only say this because this type of coverage is generally expensive and if you don't provide the same coverage you will fall into anti-discriminatory testing rules that could disallow deductions.
Whether or not you should set up an LLC and then an S Corp (LLC is not a tax-classification but instead a legal designation and a requirement for becoming an S Corp) is a completely different issue. It is generally best to be formed as an S Corp for income tax purposes but there will be more tax and filing compliance costs associated with S Corps.