I know holding companies are a common way to separate the liability of business operations from the assets of a company, but is there any legal reason why businesses don't take this a step further?

Suppose we setup a parent Delaware corporation corpA and two child Delaware corporations corpB and corpC (both wholly owned subsidiaries of corpA). Every contract the business engages in is a multi-party contract where corpB agrees to do all the work required in the contract and the customer in exchange agrees to pay corpC. CorpC would also own all the business equipment and assets and would agree to allow corpB to use the equipment whenever needed for no charge.

Question: What's wrong with that setup? Naively, it seems like this would be a nearly perfect setup with no value but all liability in corpB and all the value but zero liability in corpC. But that can't be correct otherwise every large enough business would do this. So why doesn't this work? Is there a Delaware corporation law which prevents liability and revenue from being 100% directly into two separate entities so that corpC would still be liable for things? Is there an IRS rule which makes the free usage of corpC's equipment by corpB still subject to taxes? Something else?

Any insight on this would be much appreciated! Thanks!

  • 2
    If you were a customer of CorpB, why would you want to pay CorpC? If you were a customer of CorpC, wouldn't you want some guarantee that CorpB does what you're paying for?
    – Ron Trunk
    Aug 30, 2021 at 18:41
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    Might it be fair to assume that even if this was possible, since it attempts to subvert the legal system a court would throw out protections for the offending party? Aug 30, 2021 at 18:42
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    you can't scam your way out of contracts by depositing payments to a different company.
    – Tiger Guy
    Aug 30, 2021 at 18:54
  • @TigerGuy What law makes the setup described a scam? Please point me to a specific statute, case law prececent, etc that makes the setup illegal. That is the whole point of my question. Sep 2, 2021 at 17:06
  • @wanderingmathematician Fraud, theft by taking, theft by deception, any number of statutes. Taking people's money without providing a good or service is theft.
    – Tiger Guy
    Sep 3, 2021 at 2:52

1 Answer 1


If it is a multi-party contract, generally all parties to the contract have liability for its breach regardless of who is supposed to receive payment.

It is possible to contractually negotiate for limitations of liability in a contract, but not all liability and only with clear language to that effect.

Further, if the CorpA and Corp B and Corp C all anticipated at the outset that if there was liability that CorpB incurred that it would not be paid, that would constitute both common law fraud and a fraudulent transfer under the Uniform Fraudulent Transfer Act by everyone involved (entities and individuals) because one is anticipating incurring future liability in an entity with no anticipated capacity to pay it. The circumstances would also plausibly justify "piercing the corporate veil."

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