Debitoor Dictionary

Accounting terms explained simply

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  1. Assets
  2. Limited liability
  3. Tangible assets

Dangerous asset – What is a dangerous asset?

A dangerous asset is an asset that poses a high risk of legal liability to its owner.

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An asset is considered dangerous if it increases the risk of a lawsuit that could result in financial losses. For example, a dangerous asset might have the potential to cause physical harm to others, which could lead to the owner of the asset being sued.

Dangerous assets are usually physical tangible assets rather than non-physical intangible assets. The most common examples of dangerous assets are machinery, equipment, and vehicles such as cars and motorbikes.

Dangerous assets and liability

Liability is the extent to which companies can be held accountable for their financial losses; it varies according to company structure. In the context of dangerous assets, liability is the extent to which you can be sued or forced to pay damages if someone is harmed by one of your assets.

Limited liability for dangerous assets

Corporations have limited liability, which means that company assets and finances are kept entirely separate from the assets and finances of employees, shareholders, or directors. If a corporation makes a financial loss, shareholders could lose the investment they put into the company and employees could lose their jobs, but they would not be personally financially responsible for covering these losses.

Similarly, if a company is required to pay damages as a result of harm caused by a dangerous asset, only the company’s finances and assets can be seized – the finances and assets of employees, shareholders, or directors are off-limits.

Unlimited liability for dangerous assets

On the other hand, sole traders have unlimited liability. This means that sole traders' personal assets are not distinguishable from their business assets.

As such, sole traders may be held personally accountable if harm is caused by their dangerous asset, meaning that they might have to use their own money or sell of their personal assets (such as a house or car) to settle a lawsuit.

Protecting yourself from dangerous assets

Because dangerous assets can cause significant damage to a company’s finances – especially if the company has unlimited liability – it is important to protect yourself against the risk posed by dangerous assets. There are several ways to do this.

Dangerous assets and liability insurance

Businesses that own dangerous assets usually take out specialised liability insurance, which helps provide financial protection in case harm is caused by a dangerous asset.

The higher number of dangerous assets you have and the higher the risk these assets pose, the more you will need to pay for asset insurance.

Separating dangerous assets and safe assets

Another common way to protect yourself from dangerous assets is to separate your safe assets from your dangerous assets.

Many businesses create a separate entity with limited liability, then register their dangerous assets as the property of the new entity. This means that the asset will be the responsibility of the new entity, which will become legally and financially accountable for any damages resulting from the dangerous asset.

The original owner’s finances are therefore protected from any risk associated with the dangerous asset.

How to minimise the risk of dangerous assets

The more dangerous assets a company has, the more risk they take on. It is therefore sometimes suggested that every business should own no more than one dangerous asset, as this reduces the amount of potential liability.

However, it sometimes isn’t possible to reduce the number of dangerous assets you own. For example, if you work in construction, it is likely that dangerous vehicles, machines, and tools are essential to your work. In these cases, you should focus on reducing the risk associated with each dangerous asset rather than reducing the number of dangerous assets you own.

The most obvious way to minimise the risk of dangerous assets is to keep the assets properly maintained. For example, if your company owners a car with faulty brake lights, it is more likely to be involved in a crash and therefore poses a higher risk than a car that is well maintained and fully functioning.

You should also make sure that staff receive extensive training so that they know how to avoid misusing the asset and putting themselves or another person at risk.