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I am interested in offering subdomains to people who want them e.g. helloworld.mydomain.com or blah.mydomain.com.

It is pretty much how WordPress or Blogspot handle their subdomains but I would not be hosting anything - just pointing to the person's website host location.

If somebody was to upload illegal content to helloworld.mydomain.com - would all sites under mydomain.com suffer?

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up vote 1 down vote accepted

If you are only hosting the domain then illegal content is not something you should concern yourself too much since the appropriate authorities will know how to lookup the A records where the files are hosted. It can however look crappy on your branding if you want one.

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