WordPress.org

Do I need to create any folders?

No the plugin will automatically generate the folders for you. They will all be placed under the Wordpress upload folder.

Do I need to change the permission to 777 on the upload folder?

If you host has configured the server correctly, you won't have to. But if the plugin tell you the upload folder isn't writable. Then you have to change the upload folder to 777 (chmod 777).