Verdict: Subfolder versus Subdomain SEO

Previously many Webmasters thought that subdirectories provide Search-Engine-Optimization benefits. However several renowned authorities disagreed lately. John Mueller, from Google Webmaster Central, categorically stated that Google is indifferent towards subdomains vs subfolders:

Subdomain is like an independent domain and can be even on a different server. So there is a slight benefit as down the road the website can be easily hosted on a different server than the Application. This improves security to some extent by compartmentalizing it. Secondly, Corporate Website performance is never affected by the performance of the Application(s). This is very important for new client acquisition as many people judge a book by its cover.

In case a penalty is imposed on the main domain, it may weaken the sub-domain though it may not directly carry to them. This relation is implied by Google.

Additionally the sub-domain may be independently penalized from the main domain including manual penalties. So there is a degree of independence which can be beneficial in the event the website runs foul of Google due to possibly aggressive marketing practices.

In conclusion, subdomain may be slightly better choice.