Do I Need an LLC for My Medical Billing Business?

Starting a limited liability company (LLC) for your medical billing business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a medical billing business, lawsuits can arise from things like not being able to offer healthcare providers the files they need following a devastating hack or the accidental overbilling of customers.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your medical billing business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

A medical billing statement with a stethoscope resting on it

Should I Start an LLC for a Medical Billing Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Medical Billing Business

By starting an LLC for your medical billing business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Medical billing businesses will benefit from liability protection because of the risk of being sued for data breaches, billing errors, privacy violations, and other general business risks.

Example 1: A healthcare company complains that their client’s records were accessed and stolen. They accuse you of failing to maintain the confidentiality of information, and you apologize. If they insist on suing for the data breach, their lawsuit may affect your business, but you will personally not be held liable.

Example 2: Your medical billing software got hacked, causing you to lose your files. As a result, you cannot give proper account to the healthcare providers you work with. They claim that this problem has cost their business and decide to sue. If they do, the lawsuit will affect your business, but your personal asset will remain safe.

Example 3: A client is going through his medical receipts and notices an inconsistency in the figures. He claims you had overbilled him and demands a refund. You explain that the extra zero was an oversight, but he proceeds to sue for fraud. LLC will limit the lawsuit to your business and protect your personal assets from liability.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Medical Billing Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a medical billing business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Medical billing businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Medical billing businesses need insurance to cover risks such as theft of equipment, lawsuits from clients, and damage to properties and software.

Common Situations Business Insurance May Cover for a Medical Billing Business

Example 1: While visiting your place of business, a potential client slips on wet tiles in the restroom, breaks an arm, and demands your business pay for his medical treatment. General liability insurance would cover his medical expenses.

Example 2: A competitor sues your business for libel. While you’re uncertain what you may have done to warrant the lawsuit, you know you need a lawyer to protect your interests. General liability insurance would pay for your legal defense and any required settlement.

Example 3: When one of your employees accidentally knocks a delivery driver to the ground, the driver breaks a wrist and decides to sue your business for damages. General liability insurance would pay for your legal defense and any required settlement.

Other Types of Coverage Medical Billing Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all medical billing businesses should obtain:

Professional Liability Insurance

While you strive to ensure your medical billing services make your client’s business operations easier and more predictable, there’s always a chance someone might decide you made a mistake and caused them harm. If a client sues your business for negligence, professional liability insurance would cover your legal fees and any required settlement.

Commercial Property Insurance

You made a major investment in the equipment, supplies, hardware, software, and real estate necessary to run your business. In the event of a fire, theft, or natural disaster, commercial property insurance would cover the cost of repairing or replacing your business-related property. This includes structural damage to your building and the business materials stored there.

Workers’ Compensation Insurance

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability or death benefits stemming from a workplace accident.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, workers’ compensation insurance, professional liability insurance, and commercial property insurance.

Read our Medical Billing Business Insurance article for more info.

For a new business, you can outsource software through a cloud-based software company. The software cost ranges from $60 to $250 monthly per user. You will also need to purchase backup hard drives, ethernet switches, and IT support. The cost of getting IT support is between $150 to $200 per hour.

Visit our How to Start a Medical Billing Business guide to learn more about the costs of starting and maintaining this business.

Ongoing expenses include software, insurance, utilities, office supplies, and labor costs.

Learn more about running a medical billing business.

A medical billing business might bill by the hour or by the claim. Alternatively, it could make a commission on each claim.

Learn more about starting a medical billing business.

Medical billing is a complex process, and it requires considerable expertise to do it correctly. There are numerous laws to follow; plus, many patients are not able to pay their entire bill all at once. Furthermore, billing errors can expose hospitals and doctors to significant liability.

A medical billing business handles billing on behalf of healthcare providers so they can focus on caring for patients.

Gross profit margins are between 5% and 10%.

Learn more about starting a medical billing business.