There has always been a long standing debate over whether or not to use a subdomain. Questions I commonly receive are... What is a subdomain? Is it hard for a sub-domain to rank well? When should a use a subdomain? What are the SEO benefits? What are the alternatives to a subdomain? These are all very good questions. Lucky for you, all the answers are right here. So let's get to it.
What is a subdomain?

A subdomain is just as it sounds, a sub or second-level of a domain. A standard domain looks as follows: www.mydomain.com. A sub domain would be http://prefix.mydomain.com. Subdomains do not take
on the "WWW".

All subs start with "http://subdomain/maindomain.com.

That's simple enough, I think. We have all seen a subdomain before. On to the next question.
Is it hard for a subdomain to rank well?

Subdomains rank just as well as regular domains. Having a subdomain doesn't decrease your chances of ranking on search engines. You'll just have to treat each subdomain as a new, individual site. This means work on building PR and links. As with any domain, you don't get a free ride.

What are the benefits to using a subdomain?

Let's say you had a site that had many categories in it. If you were to submit to directories you could submit each subdomain as it's own individual category and not get penalized. The links from the subdomains to the main domain would be looked upon as one way links from another domain.

What are the drawbacks to using subdomains?

Each subdomain would be looked at by search engines as a new site, which means you will need to do everything you would normally do for a new site. In short, creating backlinks, battling the sandbox, and all other problems associated with domain development are still present. If this sounds like too much trouble, you may want to consider creating subfolders within the domain. This would look like www.mydomain.com/folder.

If a sub,domain becomes banned will it effect the main domain?

The answer is yes. It may get the main domain banned if they are linked to each other. There has been proof of main domains being banned, yet i have heard of many instances where they have not. The main domain may not get banned under certain circumstances. The question shouldn't be whether the main domain can get banned because of a subdomain, but instead, why would your subdomain get banned in the first place. If you want to experiment with untested or controversial methods, do so on a new domain.

So should I use a subdomain?

If you can afford the time an money required to develop out each subdomain and if your main domain would be too convoluted by having too much on it, I'd say yes. If not, save yourself the heartache and extra work. Just make your site easy to navigate, use folders and you should do just fine.