I am using both ways, but little different than You. My music is organized in two ways:
compilation: Album name (Folder), then two folders, if there is more than 1CD (folder names CD1, CD2, bonus CD etc…), and artist-title.mp3
for single artist album only title name is in folder
In root folder there is full sized .jpg cover art of front, back, and CD scan, and I put only front cover art on MP3 tag, but in reduced size (350x350), so it not using much space.
I am also using .ogg files, but as i saw, Vorbis tag does not support images.