As Richard described is the way to organize your albums. Folders can contain albums and smart albums and subfolders, and albums can contain media items, like photos and videos.
Just an add-on about Smart Albums: You can combine the pictures from several albums with a smart album by using the "Album is ..." rule:
- File > New Smart album
- Add an "Album is" rule for any album you want to include
- Combine the rules with "Any".
For example, this smart album is showing all items from three albums combined: Sorry, my screenshot is in German, but I hope you can get the idea where to look, when setting up the smart album.

Alternately, you could tag the photos in the albums with a keyword, then use a keyword rule in the smart album.
Most of my albums are smart albums. I am using standard albums only for the albums thatI want to see on my iPhone and iPad.