SFDX: Create Project:
This creates an empty project with just the folders.
To develop in non-scratch orgs and use Org Browser to retrieve source, use SFDX: Create Project.

SFDX: Create Project with Manifest
This creates a project with a folder called Manifest. The Manifest folder will have default Package.xml. The Package.xml will contain minimum metadata types for the developer to start working.
When you run SFDX: Create Project with Manifest command, a package.xml file is created. Add the various metadata types you want to retrieve to this file.

Reference Link:
https://developer.salesforce.com/tools/vscode/en/user-guide/development-models