As I recall it, the AAC option was for syncing to iPods with lower capacity (like the Shuffle) so that it would convert your 320/256kbps MP3s to 128kbps AACs to fit more music. It did this for a copy of them though, I've never heard of it actually converting your main library and checking out an old version of iTunes it has no way of converting your whole library (just individual tracks one by one).

Having iTunes organize your music into its own folder structure was an preference you could turn off, but that option was not shown in the onboarding so it ruined many a people's meticulously organized files...