Sub-types are categories of either Individuals or Organisations, for instance; volunteers, service users, trustees or libraries, volunteer centres, schools. These can be set up in line with your service requirements.
When a contact is listed as a subtype, for instance a volunteer, all of the standard CiviCRM fields are available on their contact record, alongside any fields specific to their subtype, for instance volunteer start date or volunteer references.
Contacts can be more than one subtype in CiviCRM, and allows users to better organise their contacts.