From my somewhat vague observations, they're treated similar but Google lists them differently, it almost considers the subdomain as a seperate site.
So for example, if you have domain.com and domain.com/subdomain1, domain.com/subdomain2 then Google will often list the top level domain then the other relevant subdirectories indented under it.
On the other hand, a sub domain will be treated as a wholly individual site (generally). Guess it depends what you want to do as to which is the best.
Search Engines treats sub-domain as different site and subdirectory is an organizational component of an existing site. Generally, subdirectories are used when you need to describe what individual pages on a site are about, and sub-domains are used when you want to describe what an entire site is about.
Quick SEO Results: Based on my SEO practice, sub-directories gain faster keywords ranking as compared to sub-domains. The reason is that subdirectories are part of a existing domain which is already indexed and enjoying back links. If we are adding any new folder or page to the site then it will inherit the benefits of web site.
Easy Management: Technically, you need to put little more efforts for managing sub-domains as compared to sub-directories
Content Management: Sub-domains are definitely winner as compared to sub-directories for content management.
1. Subdomain is almost like another site
2. Subdirectory is a part of your site
It is almost always preferable to use subdirectories. Popularity of subdirectories will transfer their strenght to your main domain which is not the case with subdomains. And some strenght from your main site will be added to subdirectories.
The only right choice to have subdomains is when it is a totally different content from your website.
Subdomain is treated by google as an entirely different site. That is why people often do 301 redirects so that mydomain.com rewrites to www.mydomain.com so that all the google juice will focus in one place and not be diluted between www and .
I have 3 completely different blogs on dorkage.net--so I have them as subdomains to minimize the influence on eachother.
A subdirectory would sit on the shoulders of an existing domain and inherit its google juice, as Amit Doda says.
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