Hi, there Shamisenrat, and welcome to MobileRead.
LRF is the preferred file type for the Sony, but by no means the only file type it recognizes.
You mentioned Gutenburg as a main source and they certainly have a lot to draw from. However, there are also over 7,000 free books right here (admittedly, not all in the LRF format) that you can download for free.
You can certainly put your own content on your Reader. Open up Word, write your novel, and then save it in the RTF format. Now you're ready to load it onto your Reader using their software. You can't create links to your chapters - you'll need BookDesigner or calibre for that - but you can have the immediate joy of seeing your work placed upon the Reader.
BookDesigner is free, but there's a steep learning curve involved in using it.
Let us know if you have more questions; there'll be more members here jumping in to offer advice and help.
Have fun.
Don