If you create sub-folders under the "documents" folder, all the documents in those sub-folders will be visible on the Kindle, but the folders themselves are not visble except from your computer in USB mode. Thanks to the guy who posted this a week or so back.
If you create a new folder _not_ under "documents" (i.e. in the root) then the files are stored but the files are not visible on the Kindle, onl;y on the computer. I have a folder called "read books" for books I've finished. If I want to restore one all I have to do is plug into USB on any computer and drag it back to "documents".
Things don't get automatically transferred to the Kindle from your computer. You have to open the documents folder on your Kindle* and drag/drop or copy them from your computer. Only what you select will get copied, not everything (unless that is your choice). You can also copy everything from your Kindle onto your computer. I do this regularly for local backup of my Kindle.
*Your computer "should" recognize the Kindle when you link up the USB cables and map the Kindle memory as a virtual disk drive (give it a drive letter and make it visible in "my computer." Depending on how you have your settings on your computer, it may also automatically open the virtual drive in a new window, or ask you if you want to do so.). If you have an SD card, it should map it as a separate virtual disk drive also.
I put books in folders on my Kindle for my convenience when working on the computer, but they all show up at the root portion of the home screen. This is the same way Microsoft Reader does things. This also means that it does not matter wether the books are on the kindle or on an SD card in the kindle. The kindle looks at everything it recognized as a document directory and grabs all the books it recognizes form those entire directory trees and puts the compiled list on the home screen.
That said I really wish it did recognize a hierarchical structure. I have gone to using some of the tools available to help organizing my books by perpending information to the title to keep series together.