If you have your songs properly ID3 tagged, it shouldn't matter how you organize your folders right? Searching by Artist / Album / etc should work for USB I would think. I can't remember if used those functions when I had a USB drive plugged in during my ED trip. But I think I organized my files in a similar way. Artist \ Album \ Song.m4a.
As for the whole audio quality thing, be careful, it's a rabbit hole. But typically, sound quality is going to be only as good as your source. There will be differences in the end result between iPod -> Analog vs USB -> head unit because different DACs will be decoding the files.
Let your ears decide which way you prefer.
2015 228i M Sport 6mt + Track Handling Package
2012 328i Sport 6mt (retired)