Can third party content on sub-domains harm the main site's search rankings?

Question

I have a site that is a "portal" or "directory" for service providers. We opened every service provider's own page on our site, but now we get a lot of applications from those providers that want sites from their own. We want to make a full site for every service provider, but rather put them on sub domain URLs. (They don’t mind, it's OK for them.)

So, my site is www.exaple.com Their site will be: provider.example.com

Now I have two questions:

1. Can the content on the provider sites harm my site in SEO?
2. If one from those sub domains is punished by Google because the owner does "black hat SEO", how it will affect the rood domain? Can it make the root domain get punished?

Answer 1

Yes it appears that the root domain can be affected by the activity of any sub-domains, checkout the article here on how Google treats sub-domains. In particular the following quote:

As far as how those sub-domains are treated, well, they get the same treatment the whole website gets. So any malicious software you install on a sub-domain will effect the whole website, so be careful.

Also as of August 2011 Google recognises links within sub-domains (i.e. one sub-domain to another) as internal so you don't get extra juice by having a lots of internal links with a series of sub-domains.

http://googlewebmastercentral.blogspot.co.uk/2011/08/reorganizing-internal-vs-external.html

Answer 2

Google says that just having the subdomains will not hurt your SEO.

But keep in mind that any abusive behaviors (blackhat) on any of the subdomains can affect everybody else.