Structure

Question 1

setup()

Answer 1

setup()

The setup() function is called when a sketch starts. Use it to initialize variables, pin modes, start using libraries, etc. The setup function will only run once, after each powerup or reset of the Arduino board.
Example

int buttonPin = 3;

void setup()
{
  Serial.begin(9600);
  pinMode(buttonPin, INPUT);
}

void loop()
{
  // ...
}

Question 2

loop()

Answer 2

loop()
After creating a setup() function, which initializes and sets the initial values, the loop() function does precisely what its name suggests, and loops consecutively, allowing your program to change and respond. Use it to actively control the Arduino board.
Example

const int buttonPin = 3;

// setup initializes serial and the button pin
void setup()
{
  Serial.begin(9600);
  pinMode(buttonPin, INPUT);
}

// loop checks the button pin each time,
// and will send serial if it is pressed
void loop()
{
  if (digitalRead(buttonPin) == HIGH)
    Serial.write('H');
  else
    Serial.write('L');

delay(1000);
}