That ZotFile setting is for linked files, not stored files, so you'd have to set it up to convert stored files to linked files outside the Zotero data directory (in iCloud Drive in your case, presumably).

Note that collections and filesystem folders are conceptually different and can't mirror each other, because you can store items in more than one collection, whereas files can exist in only one filesystem folder.

Based upon my reading it seems that I if stick with sync I should not rely upon a cloud option like i-cloud for the zotero data directory because of issues with database corruption

Right, Zotero has its own sync system to do this safely. The data directory should never be stored within a cloud storage folder.

Is there a way to make the storage folder names make more sense? Or have more than one paper in one folder?

The 'storage' folder is internal storage — you're not meant to interact with it directly. You can still search for PDFs via Spotlight, and you can set up a smart folder in macOS to show a list of all PDFs within the 'storage' directory if you really want to view a list via Finder.

But generally, as long as you're using Zotero, we recommend just accessing your files via Zotero, which gives more advanced organization/tagging/searching options than Finder (including the ability to have items in multiple collections at once). You can still open PDFs directly from Zotero, and you can still drag files straight from Zotero to folders, email (depending on your mail client), etc. And you can always right-click and select Show File to access the file in Finder directly.

If you really want to keep your PDFs in a separate folder structure or sync files via iCloud, you can read up on using linked files and ZotFile.