Q: Folder Structure in iTunes

In Finder, the folders are structured:

Music > iTunes (which has about a thousand folders under the artists names, a folder named iTunes Music and a few .itdb, .xml and .itl files)

inside the iTunes Music folder are over 800 folders named after different artists not contained in the iTunes folder.

Should all of the folders named for the artists be in the same folder? Either iTunes or iTunes Music? What about the .itdb, .xml and .itl files? I have 20,000 songs in my library and am using Tuneup to clean it up. The program is having a hard time finding files and when I looked, I realized I have some music in one folder and some in anaother. It seems to me that they should all be in the same folder.

Thanks in advance.