Apples instruction are here - http://www.apple.com/icloud/setup/
PS is not a storage place - it is a transmission place - it holds the lessor last 30 days or 1000 photos - if you want to keep photos you eed to import them into iPhoto - this can be automatic or manual as you choose - if it is manual then only the photos you manually import are saved in iPhoto - if it is automatic then eveny photo in PS is saved
It is pretty simple
So what is the best way to manage this. Should I turn off the 'Automatic import' in iPhoto or have it save the photo in iPhoto photos/events?
That totally depends on what you want