No, Google does not inflict penalties on sites that use subdomains.

It is a popular myth, perpetuated by scaremongers and we can assure you that Google does not whip out its red card and provide your competitors with a free kick, leaving you at a disadvantage.

In the interest of fairness, it is true to say that there is a small, and by that we mean tiny, ranking difference between main domain-based content and subdomain based content. This is not a penalty.

Something will always naturally come first and as a consequence, something else will come second.

For example:

As you will see from the above search for Lawrence Rand Valuations, their main domain based valuation page ranks top. Their ValPal subdomain based instant valuation page ranks second. You can also see that further main domain based pages which contain information about valuations rank below it.

This demonstrates clearly that Google has not given the subdomain based page a penalty, and furthermore, it has correctly ranked the ValPal page higher than slightly less relevant, but still topical main domain based pages and only slightly less than the main domain based page for the explicitly searched subject of valuations.

To clarify, we are not saying that you can do either, subdomain or subfolder, without consequence. They both have their strengths and weaknesses, however, Google will not penalise you for their use.

Perhaps the reason for scaremongering regarding subdomains has more to do with the fact that when you lump everything together in the main domain, on the one server, it makes control and maintenance easier for the people managing it.

For further clarification, we suggest you watch this video from Google’s own Webmaster John Mueller HERE.