At first we tried to keep the individual sets in their own box. That didn't last long because he played with them in different rooms and then started combining sets. Then a family donated A LOT of Legos to us but they were not organized by theme. So now we have multiple plastic shoeboxes to store the Legos in. Each box has a single color in it. These boxes are kept in my son's room. He's almost 7. They are stacked against the wall. When he is ready to build, he simply removes the lids and sits by the boxes. When he is done, the lids go back on and the boxes are stacked. All building projects occur in his room, away from his sister and out of my way. He can bring a finished project downstairs to play with or display if he wants. This system has worked really well for us. Also, we have an accordian folder to hold all of the instruction booklets.
Did you realize you asked a question that has plagued most moms?? Also, there is a French FaceBook page about stepping on the Legos. Ouch!