(FORTUNE Small Business) – Johnny Deep's in deep debt. More than $700,000, to be exact. Having spent the past year fighting off a slew of lawsuits, Deep and his music file-sharing service, Madster.com, filed for bankruptcy March 11. He claims only $40,000 of the amount is his own personal debt. Thing is, his creditors don't care. And if the lawsuits don't go his way, his house, car, and any other personal effects are up for grabs.

Deep's story might differ from your own--you could call a legal fight with the recording industry a once-in-a-lifetime experience--but the fundamental financial issues are the same for millions of small business owners. Your business is in debt for one reason or another, and you haven't done the best job of separating your business finances from your personal ones. When the creditors come calling, there's little you can do to fend them off.

Or you can play it smart from the beginning. That means taking advantage of numerous strategies, from incorporation to bank financing. Or as one business consultant puts it, always use other people's money.

First, register your business as a corporation or limited liability company (LLC). Of the 25 million small businesses that file tax returns every year, about 17 million are sole proprietorships. Such a status is cheap and easy to obtain but doesn't offer your personal assets much protection from creditors. In a sole proprietorship, you are your business, says financial planner Louis Stanasolovich, adding, "I think everyone should be an LLC or corporation." Depending on where you incorporate, the process is usually easy and largely doable online at sites such as quicken.incorporating.com.

Affixing "Inc." or "LLC" to the end of your business name isn't enough. You have to live up to the title. Stop paying your personal bills with the same account you use for the business. Resist taking money out of the business whenever you want to buy a new, shiny something or other. And remember to sign every legal document with "president" or "CEO." Sounds stupid, but it could make a big difference. Says Stanasolovich: "If you don't walk like a duck and don't talk like a duck, banks and creditors won't treat you like a duck."

If you need to borrow money, use credit cards and other kinds of personal debt only as a last resort. Remember, you'll still owe that money even if your business is no longer around to make monthly payments. A bank loan is a much better bet. If your company goes under, the bank has claims only on the firm' assets. As if I didn't try that already, you say. Well, try again, implores Bruce Phillips, a senior fellow at the National Federation of Independent Businesses. "The rejection rate isn't as great as people believe. It may not be for the amount you asked for, but obtaining some loan is possible," says Phillips. Don't go wasting your time at the local Bank of America branch, expecting it to be interested in loaning you $25,000 or $30,000. Gene Fairbrother, president of MBA Consulting, which works specifically with small businesses, recommends looking at smaller community banks. "They'd love to do a $20,000 loan," says Fairbrother.

If foiled by bank rejections, you might consider a home-equity line of credit or a loan against your life insurance. You'll find yourself paying around 7% instead of the 18% to 24% your personal credit cards charge. But if you do end up bankrolling your business with your house, be careful.

For now, if your incorporated business goes bankrupt, personal assets like your house can't be seized in several states, such as Texas and Florida. But that may change. Partly because of the Enron debacle, Congress is considering legislation that would limit such home protection to just $125,000.

When all else fails, many entrepreneurs turn to their credit cards for financing. Nearly 50% of companies with ten or fewer employees use credit cards to finance their business, and self-employed people carry 20% more credit card debt than the average American consumer. Not surprisingly, a lot of financial planners and business consultants think that's a big no-no. "If you're starting a business, and the only way to start is with credit cards, your chance of surviving is so small that I'd wonder about starting at all," warns Wayne von Borstel, a financial planner in The Dalles, Ore.

Of course, companies built on credit cards can exist and even succeed. Laura Tarbox, a financial planner in Newport Beach, Calif., says she racked up close to $50,000 on credit cards in the late '80s when she started her financial practice. "I didn't own a home, so I couldn't take out a home-equity line of credit. I was in my mid-20s with no track record. Financing was impossible to come by," recalls Tarbox. Still, she says, there's a smart way to do it and a, well, not-so-smart way.

Tarbox recommends deciding in advance exactly how much money you're going to borrow on credit and sticking to it. "People say to themselves, I need just another $1,000, then another $1,000, without any firm plan to pay it off," she says. And run the numbers before you put those charges on, says Fairbrother. "Figure out how much money you've got to pay on a monthly basis, and if you have the cash flow to do it," Fairbrother advises. "If not, you're going to be in for a big surprise."