It's always better for a blog on its own domain. I think there wouldn't be any problem if you use 'sub folder' as long as there's a link from the main site's home page. You may also think about to use 'sub domain' to host your blog.
A subdomain or a blog on its domain is better because
1. It back up your site too for links (if you do)
2. It sends the traffic that your blog would get (in a better way. your URL will show your main business site)
3. Better in terms of SEO and rankings. The helps blog rank better and blog helps site rank better.
Of course, that should not be used solely for link building. A good blog may brand your business very nicely.
I've done this on another site where I put the blog on the ,ino tld and the main site is on the .com
It works well. The blog is getting some traffic. I put some adsense as well and have made a few bucks.
If you are going to turn it to membership site like seobook,seomoz then go for 'subfolder'
I am wondering why Matt Cutts is blogging on 'subfolder' ?
bogart (8 September, 2009)
For SEO purposes, your blog should live in a subfolder off the domain, so you can distribute link equity across your site. A rising tide lifts all ships.
If you're still in doubt, looks at how the pros do it:
sturat (1 October, 2009)
Sub-folder better for pagerank