Possessing a bad credit history, is a very common hurdle for individuals who wish to start and run their own businesses. Unless you win the lottery, or have an extremely rich relative, then you are going to have to be able to retrieve a certain amount of capital startup funds. The easiest and quickest way to retrieve capital startup funds is through loans or lines of credit. This can be very tricky for the individual who wants to start a business with bad credit.

First, let's take a look at starting a business as a sole proprietor. The most common mistake for an entrepreneur looking to start a business, is to establish too much personal financial liability in connection with the business debt. A sole proprietorship establishes the absolute maximum liability on the business owner. All business debts are the sole responsibility of the owner, and any outstanding debts, if the business happens to fold, affect the owner's credit and finances directly. Keep in mind, that 80% of small businesses fail within the first five years according to numerous government reports. Sole proprietors who have the business debt tied to their personal finances, will be 100% liable, when those businesses fold.

Next, let's take a look at starting a business with a partner. The second most common mistake an entrepreneur looking to start a business makes, is in thinking that they can lessen their liability by taking on a partner. This is a very common myth, because if and when, they business may fold, the personal finances of both partners suffer equally. Yes, it is better to have two or more partners, to shoulder the financial load, however, if the business itself is the sole means of paying for all the financial responsibilities, then whether there are two partners, or fifty partners, whenever the business fails, then everyone's finances and credit suffer equally.

Now, let's take a look at corporations. Ah yes, there is a light at the end of the tunnel. What is a corporation? A corporation is a continuous independent entity which is created by an association of individuals, under authority of law, which has independent powers and liabilities from the members of its association. Okay, that's the dictionary definition, but in laymen's terms, a corporation is like another individual, with another social security number, which can file its own tax return, declare bankruptcy, and has all the powers and liabilities of an independent business owner.

What this means, is that if the corporation fails, then the individual who runs the corporation has absolutely no liability whatsoever. A corporation simply dissolves into thin air when it fails. In this way, an entrepreneur who starts a corporation, has absolutely no personal financial risk or liability. An entrepreneur can start multiple corporations which may fail, without affecting their personal credit or finances in a negative way.

Okay, so if I have bad credit, then how does starting a corporation benefit me? Since a corporation is a new entity, with a new social security number, then the corporation has no bad credit. This means that the corporation can now apply for loans, credit cards, and any other type of credit. The individuals who run the corporation may have terrible credit, however this has absolutely nothing to do with whether or not the corporation's credit is good or bad. Many banks and credit card companies, are much more willing to give corporations higher credit limits, with much better terms, than individual business owners. An entrepreneur with bad credit can start a corporation, and receive credit based upon the corporation's credit history, without every having their borrowing history checked. Many entrepreneur's with bad credit, have utilized the corporation's limits of liability and borrowing potential, to attain massive amounts of startup capital to fund business projects, which they themselves would have never had the opportunity to fund otherwise.

The bottom line: if you have bad credit and no capital, then start a business as a corporation. This will limit your financial liability, and give you the opportunity to attain capital based upon the corporation's credit history, not yours.