MacOS – Which applications should be in the Utilities folder

It's not really considered "bad" to put folders there, but (as you've seen) it can cause problems with some apps.

The reason the updates are failing: The installer/updater looks for an app in the /Applications folder and doesn't find it. So, it assumes the app is not yet installed and that you are trying to install the whole app from the update, so it fails.

Alternatively, the app could be duplicated because the updater doesn't find the app and decides to install a new copy.

To avoid this problem, here's what I recommend:

Create another "organized apps" folder somewhere.
Make folders in it as you have in your /Applications folder.
Open one Finder window to /Applications and one to your new one.

Select ten apps from your Applications folder. Right-click and choose Make Alias. Give it a second. Then, drag the aliases you've made into the new folder. Repeat this (ten apps at a time) with the rest of your /Applications folder.

Now, you've got 'links' to all your apps in your new folder. Organize them how you want. You can now double-click the aliases in that folder to launch the apps they correspond to. Feel free to re-name and reorganize these aliases as you want.

Note that, with this method, updates should work. You will, however, have to manually add each app you install to the other folder.

/Applications is, like you said, global. Apps run from that folder have no different permissions or privileges if they were in any other folder. It's the same as running an app in the ~/Downloads folder, it's just neater to have the global /Applications folder.

Having said that, apps in the ~/Applications folder are limited to being run by that user since the ~/Applications folder will have permissions on the folder for the user they're contained in.

In my hunting around, the ~/Applications folder has global read-only access, but that can vary if a user decides to modify the ACLs (Access Control List) aka permissions.

Hope that clears it up for you!