Why is it that some web design and hosting companies will not let their customers use a domain name they purchased from another company - even though the customer hasn't built a site yet?

Should that cause any red flags for customers in such a situation?

Thanks!

I've never experienced that, but yes, I guess it should.

Yes it certainly should raise some red flags, lots of them.

YOU should be the registered owner of the domain, YOU should have control over it, NOT your host or your designer.

Agreed. While I'm still new in the hosting thing and I haven't yet got into design, the site owner should have full control of their own domain and be allowed to move it to another company if they so wish.

Lots of companies do provide domain name registration and web hosting services in additional and vice versa. But in any case end customer is owner of those domain names. No company.

Definate red flag, your host should allow you to use a domain name registered anywhere. Before you decide to register your domain name with your host, see how easy it would be should you decide to switch hosts or domain registrars!