Yes, the database is for you, to tag and organize and use your files any way you wish. You can use views (standard and custom) to see your files organized any way you wish, including in views that look very much like folders and subfolders and files, if you desire.
The cool thing is, you can have several views of exactly the same collection of files (tens of thousands in my case), each looking at your files in a different way, as if you had many copies of your files, each in a distinct arrangement. I can view my files as if they are organized into folders and subfolders by Artist, or Album, or Year, or Type (of music or whatever), and many more, all without ever touching the files.
For instance, my Artists view lets me wander through my tracks something like this:
B
B\Beatles\
B\Beatles\Norwegian Wood
Or, I can use my Decades view:
1960s
1960s\1965
1960s\1965\Beatles
1960s\1965\Beatles\Norwegian Wood
Or my Albums view:
R
R\Rubber Soul\Norwegian Wood
Or my Titles view:
N
N\Norwegian Wood
Etc, etc, etc, almost anything is possible, with the right tags in place. The above are not alternative ways to organize files, they all exist at the same time as virtual structures. Contrast with relying on physical folders\files, where only ONE organization is possible.
In each database record, MC stores a link to the physical media file (or files, because it can link to the main media, plus a related image/cover art, plus related extra files). Again, no right or wrong, so I do mine simply. My physical files are in a folder called Music, then subfolders based on Artist name first letter,, A, B, C, etc. That's it. After many years I haven't found a need to make the physical storage more complex. I use Rename to put files into this arrangement, AND to give each file a consistent name derived from certain tags, so they all live happily together.
Thanks to MC's expression language, tag manipulation can lead to more ways to organize. Years ago, desiring a Decades view of my music, I stored a Decades value tag for each track, AND I also tagged each track with its Year of original release. But putting in the right Decade tag for each track was a pain. So I came up with an expression that lets me derive the Decade from the Year, allowing the same Decades view but without the Decades tags, which I then deleted. The view dynamically determines and shows all tracks in Decades without actually storing that data as tags. The flipside, if I ever want to recreate the Decades tags it will be simple based on the Year values.
Keep in mind that MC already has a variety of Standard tags that are common among many media player/manager systems. And it has a bunch of suggested additional tags that might be unique to MC. PLUS, the coolest feature, you can create custom tags (database fields) as desired, to help you tag as precisely as desired. I have a bunch in my Music library.
Sorry to be long-winded but for me, the database aspect of MC is the source of its power.