I hang most of my two younger DD's clothes. Their dressers are very small, and clothes get all wrinkley from being smooshed up in the drawers. This is our system of organization:
Each girl has two "milk crate" type baskets that sit on top of the dresser. Panties and undershirts get thrown in one, and socks get thrown in the other. I don't bother to fold the panties and undershirts, but I do match and fold socks.
Top drawer of the dresser is for pajamas.
2 of the 3 remaining drawers are for clothes they do NOT wear to school. Sweats, junky clothes for mucking around in the yard on the weekends, etc.
The bottom drawer is for jeans. Just plain old, match-with-anything jeans.
Everything else gets hung. I *always* hang outfits together. Sometimes these are outfits that actually "came" together (their Gymboree stuff, etc), more often that not, just outfits that I have put together of things that match. Also hanging are sweaters, dresses, and the odd random shirt that has no bottoms to match (these get matched eventually with the jeans in the drawer). Both DDs know that they may NOT mix and match from the outfits that are specifically hung together without asking me first. I believe in letting kids pick out their own clothes, but only within reason. I have not spent $100's of dollars on Gymboree and other clothes to have them go to school looking like color-blind ragamuffins.
Eldest DD is free to make her own system. When I do laundry, I hang any of her clothes that might wrinkle on a hanger straight from the dryer just to keep them wrinkle-free. Everything else gets put in a basket and delivered to her. She puts them away in her dresser or hangs them up as she sees fit. She is free to decides what matches or doesn't, but I still reserve the right to send her back to her room is she looks ghastly... which, for the record, I have never had to do.
So that's how we do it! I will admit, I am neurotic about how my kids dress, and they never leave the house without their hair brushed and fixed, usually with pretty bows or clips. Others may not be so neurotic, and I guarantee you will have less work!
PS: I am on my 4th load of laundry for the day.

Being neurotic has its price...