File sharing is P2P (peer to peer) sharing of files. It means you can upload (give) a file to other user/s or download (take) a file from other user/s. Some web sites offer incentives (credits) to people who upload files or other sites who force you to upload a certain amount so you can download. There are sites from users that you can download without limits but these are paying sites.
Illegal downloading is the sharing (upload or download) of files that violates copyright laws.