If this says "Create" then this user currently has no Windows password (the
password they use to access shares and possibly log onto the domain) entry in
the smbpasswd file. If you want this user to be able to access Windows File
Sharing on this machine, check this box.
If this says "Update", the users Windows password (the password they use to
access shares and possibly log onto the domain) will be changed along with the
system password.
It is recommended to keep these passwords in sync whenever possible.