Folders used to be a nightmare to manage. It’s a much better experience now.
To set up the drop down, you’ll create a choice or lookup column and fill that field out when a document is uploaded. You can add fields to track Due Dates, Assigned To, Content Type, or anything else you need to track. Then you Group By or Filter based on that column, and/or create views that filter on those fields.
If you need to use folders, you can still create the columns and the views. I recommend creating a view that will show you all documents without folders - it will make it easier to find something that gets put in the wrong, or duplicate files. To do this, create a new view with no filters, scroll to the bottom and expand the Folders option - select the option to see all files without folders. You could have folders AND metadata.
If you need to have special permissions on folders, check out using Microsoft Teams and private/shared channels. It’s easier to manage in my opinion.
Hopefully this helps - ask away if you have more questions.