I used to think it was obvious - just let iTunes manage stuff. After a number of arguments with various people on discussion forums, I've realised that there probably isn't a single correct way to do things, it all depends on where iTunes fits as part of your music management strategy.
The Big Red File Organisation Button
So first of all, we're dealing with two iTunes preferences. The settings are in the edit->preferences->advanced dialog under "iTunes media folder location". You'll want to check or uncheck "keep iTunes media folder organised" and "copy files to iTunes media folder when adding to library". In most cases, you'll set both to the same checked/unchecked setting (but do read on before deciding).
This dialog also tells you where your files live (if iTunes is managing them). Alternatively, inspect the properties of a track ("get info") if you can't find it.
Letting iTunes Manage Your Music
Unless you really really need to, because your tunes are also managed and used by another application, I'd recommend you let iTunes do the work. If you go and "keep iTunes media folder organised" it'll automatically file music in a single "iTunes Music" folder, sorting tracks into an "artist/album" folder structure, mirroring any tag changes in the file/folder names.
It makes sense, if you're letting iTunes manage what your files are called and where they go, to have iTunes copy any imported tracks into the iTunes music folder - ensure the "copy files to iTunes media folder when adding to library" option is ticked.
I use this approach, but then I use iTunes to manage a secondary, portable copy of my library, primarily for feeding my iPod and iPad. The key advantages of this approach are that your file and folder structure represents your library (so you can find your files), and your files get stored in a single location.
You can even use this option to make sense of a messy library, turning "one big folder of MP3s" into a nice organised folder structure (assuming your tags are correct). Do make sure you have a back-up of your original files first though.
Managing Your Music Yourself
Leave the options off and iTunes will leave your files alone. Whatever you change when editing file info in iTunes, the filename, folder and location will remain unaffected. This is absolutely the way to go if you have other applications relying on these files, or if you just don't trust iTunes.
Don't Cross The Streams, That Would Be Bad
Be VERY careful when switching from one approach to the other. If you have the music management option switched off, turning it back on has been known to delete files (maybe they're known to iTunes but not in the iTunes music folder, or they're now squatting illegally in the iTunes library folder), so best to back up your files before radically restructuring your library.
The Big Decision
It's worth realising that letting iTunes manage your files isn't some kind of "nanny mode", and it doesn't hide the details (you can still go explore the files on your hard drive). It's just a question of which option works best for you.
- Letting iTunes manage your files - if you use iTunes as your primary application for browsing, managing and playing your files (or the "portable" versions of your files if you're like me and keep an additional lossless library) then yes, let iTunes manage your files.
- If you play, manage and tag your files in other application(s) and only use iTunes to feed your iPod, and maybe as an occasional music shop and player, then turn this off and don't let iTunes mess with your files.
