The location of the music database should be arbitrary. And you can have multiple libraries - the app will use the last-opened library, the one you double-clicked (if you launched Music that way) or will let you pick one (if you option-launch Music).
FWIW, my Music library is ~/Music/Music/Music Library.musiclibrary
But that library may reference media files in any location. With Music running, go to Settings → Files and you can see the media folder location. In my case, it’s a location inherited from iTunes: ~/Music/iTunes/iTunes Music
:
When you purchase music via the iTunes Store or when ripping CDs, the files are placed in that media folder.
If you drag/drop music files to your library they will be copied to the media folder location if the “Copy files to Music Media folder when adding to library” box is checked. If not, then the files will be left where they are and the library will simply add a reference to the file’s original location (meaning that if you delete that file or move it to another storage volume, the Music library will not be able to find it).
The “Keep Music Media folder organized” checkbox may be used to tell Music to organize the files in a particular pattern within that media folder (artist/album/track, with the tracks named with disc and track numbers so they sort in the album’s play sequence).
If you have files in your library that are not in your Media folder, and/or if you want to reorganize them according to the “Keep organized” algorithm you can select File → Library → Organize Library…, check the appropriate boxes and click OK:
The Consolidate option will copy any files not already in the media folder to that folder. The Reorganize option will move files in the Media folder so they fit the above schema.
BTW, this is a good way to move your media to another location without breaking anything. Create a folder for the new location, change the media folder, then consolidate your library. Everything will be copied to the new media folder. Once that finishes, you can delete the old media folder.