Windows has two modes of operation – Domain and Workgroup. Depending on the environment that your computer is in, you will be running in one of these two modes. Most home and small business environments will be Workgroup, and most mid- to large businesses will run in domain mode. There are different features and capabilities depending on each, and each serve a purpose
Workgroups can be best understood as a loosely connected group of computers. They rely on each other for nothing, but they are there to share resources should the need arise. There is no centralized management and so there is a low barrier to use. By default, Windows XP is in this mode.
Domains, on the other hand, provide centralized management and security. User access is controlled from a separate server called a domain controller and there is a “trust” built between systems in a domain. There are much more robust differences as well.
A workgroup is best understood as a peer-to-peer network. That is, each computer is sustainable on its own. It has its own user list, it’s own access control and its own resources. In order for a user to access resources on another workgroup computer, that exact user must be setup on the other computer.
In addition, workgroups offer little security outside of basic access control. Windows “share permissions” are very basic and do not offer any kind of granularity for “who” can access “what”, etc.
Workgroups are more than adequate, though, for most small business and home use.
A domain is a trusted group of computers that share security, access control and have data passed down from a centralized domain controller server or servers. Domain Controllers handle all aspects of granting users permission to login. They are the gatekeeper. In addition, most modern domains use Active Directory which allows and even more centralized point for software distribution, user management and computer controls.