That's very easily explained:
All virtual folders (left) contain documents, which are displayed in the document list (in the middle). The documents are stored encrypted in a mySQL database (if your documents are saved under "My PaperOffice Documents") locally, which in turn can be compared with your current filing cabinet. Or unencrypted directly on your drive (if you save your documents under "My Windows Documents") Of course, you can also add a subfolder to each folder. Just as you are used to from your Windows Explorer.
Documents can be saved individually in your folders or even linked through a document folder. This allows you to connect multiple documents that belong to a business transaction to one document folder. These documents will continue to be stored individually in PaperOffice, they only make a connection between each other.