What prevents a business from separating the liability and revenue into two separate entities?

Question

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!

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."