Collars protect the outer clothing, such as the gown or suit, from the oil, sweat, and wear of the neck. That's one of the reasons why separate colors were popular in the late 19th/early 20th centuries. Prior to that it was very common for collars and cuffs on shirts to be replaced with time. They wear out, and since they are the most visible portion of the shirt, they need to look nice. No reason to waste the large quantity of the fabric that's in the body and sleeves, just replace the very small part that's worn out.

Collars on outer clothing, like suits, are somewhat there for appearance and balance, but you also have to finish off the neck somehow. Cutting a hole and leaving it raw doesn't exactly work for more than one wearing, it'll just fray and rip. The exact style of collar, whether it's a small band or tall standing collar, varies with fashion trends.