in regards to layers:
Use layers. Period. You can always merge your group and work from a flat image in need be in the end, but you can never split a single layer in reverse without a hassle. There's nothing you can't do with a layered image that you can do with a flattened image because, essentially, a layered image is just multiple flattened images together. (durr, right?)
And saying that you can get a more 3d effect by flattening an object just does not make sense.
+1 to layers, layer masks. They save you mounds of time and give you better results.