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We recommend users create small niche stores (a few thousand products or less). These size stores are easier to promote and manage.
With a small store you tend to lose the need for sub-categories.
However with a big store (many thousands of products) sub-categories almost become essential.
I'm not really sure how search engines treat sub-categories. I'm sure there are lots of SEO posts out there regarding that topic.
What I would focus on is getting your category structure set up so that it makes sense to your end user. You definitely don't want a user to be confused when they are trying to find what they are looking for. Your category names should make sense and if using sub-categories, organized properly. Also, you want to make sure the right products are in your categories. Don't add products to categories that don't "fit" in that category.
I hope this helps.