Again, I don't know all the ins and outs of wma DRM and license issues, so I'm just repeating what I've read on various audio forums.
As for formats, it depends on what you want to be able to do with your files.
MP3 is the most widely supported format and if encoded using the right settings, will sound very good.
Ogg Vorbis is open source, currently only a few portable players support it, though. Better than mp3 at lower bitrates, equal or slightly better than mp3 at higher bitrates.
MPC is generally accepted as having the best sound quality (at higher bitrates) of any of the lossy compression formats, it's good if you will only ever playback files on your pc, it most likely will never have hardware/portable support.
AAC/MP4/M4A/etc will probably eventually replace MP3, other than iTunes it is not widely supported yet. MC has limited support for files created with iTunes.
If you have (or will have) lots of hardrive space available, a lossless format like Monkey's Audio (.ape) is a good choice. One of the MC developers, Matt, is also the developer of Monkey's Audio, so MC has great .ape support. The other "best" choice for lossless would be FLAC, but currently MC does not support that format. The advantage of a lossless format is that it retains the exact sound quality of the original from which it was encoded. You can convert lossless files to any lossy format as needed.
My own library consists of lots of mp3s (mostly from dowloads at EMusic and stuff some friends have given me, none of it from P2P). When it comes to ripping my own cds, i'm kind a torn between vorbis or mpc or just biting the bullet and commiting to lossless, so I have some of all of those formats also.
Rob