Would it be better to create a subdomain or a subdirectory when it comes to SEO? Well, it depends!
First off, you should understand that gaining a strong ranking on search engines is the result of a collection of good practices and correct decisions. The choice of utilizing subdomains or subdirectories is just another factor contributing to the “power” of your domain.
Search engines consider a subdomain as a seperate entity. Although there is some association between the main domain and its subdomain, it is probably in your best interest to go forward with a subdirectory structure unless you have a substantial amount of content.
Generally, subdomains are beneficial to larger sites (at least a couple hundred pages). For example, Citysearch.com is loaded with a ton of information and categorizing it into subdomains (titled after different cities) allows them to organize the content more effectively. This practice also allows the search engine to categorize each subdomain more easily and effectively and rank it in a more appropriate fashion.
On the other hand, sites that are not as large are perhaps better off proceeding with a subdirectory structure. For instance, the creation of a blog running off a subdirectory will play a stronger role in strengthening the rankings of the main domain. As each new page and/or post is added, it builds onto the “scorecard” of the main domain.