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How do I put the ePub files on it for the Kobo to recognize it?
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Three methods:
1) use a file manager like Windows Explorer to drag and drop the EPUBs onto the SD card while the e-reader is connected to your computer.
2) use calibre, a free e-book management system.
3) use the card reader in your computer to transfer the EPUBs to the SD card.
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but isn't there a limit to the number of files in the root directory?
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If the file system on the WiFi works like the Windows file system, the only limitation of the number of files that can be placed in the root directory is the total number of files that can be placed on the SD card.
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I've read that it doesn't recognize folders on the SD card. Is that true?
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No, that is not true. The e-reader recognizes EPUBs organized into folders. What it does not do is show folders in the user interface. i.e. all of the books organized into folders would would appear in the Books area of your e-reader.