The difference between the WordPress.com and Self hosted .Org is how the service is offered.
WordPress. com Option: It is platform hosted option and offeres a lot of benefits. For example, no plugin issues and no plugins to add for specific set of operation. SEO support is built into the account. You can buy custom paid themes from the dashboard itself. You can buy upgrade for hosting and domains from the account. Theme support for the paid themes is included into the agreement. As for the free themes, they are kept on the system as long as the version of WordPress support the tags. No issues for the version out of date with the core install. Also no security issues due to PHP Core updates in the WordPress. WordPress.com is a good option for those who don't want to look at the technical side of the things. And this option is also good if you are more focused on the content itself. It has built in community that likes, follows and shares the content across.
Few downsides though: Free plan is limited with the account space. It also doesn't allow you to use plugins. It has high cost for the domain compared to Godaddy. You also can't use the ads on your WordPress.com blog.
WordPress.org Self hosted option: In this option, everything technical is on your shoulder. You have to find the host to install WordPress. You are free to use any plugins on your website. You can also use affiliate ads or adsense ads on the blog. There is no restriction on how you use WordPress. You can also create themes and plugins for community or yourself. You have complete control over what goes inside your installation. You have to manage the SEO using the plugins or your own way. This is a good option for those who have some technical background or can learn along the lines. So there is going to be a learning curve. You can learn small things and eventually get control of install.
Which is better? That depends on you. If you don't want to manage CMS from technical side, then WordPress.com hosted option is much better. Otherwise WordPress.org is a good CMS for blogs, e-commerce site and other type of sites.