I'll sky the flag on an illegal formation as well.

I will toss a flag on the defense at or near the spot. Only dead ball fouls do I sky the flag (false starts, encroachments, etc.)

while I don't have a problem with the yellow showing on anyone else for the previously stated reasons, I personally don't like it as part of my uniform. For years I had it taped but then the tape got too heavy and as I ran it would start to come out slightly. Now I swear by the flags that Honig's has that have the built-in white ball at the top. They have enough weight to go far, too.
The reason I like the white is because even though I wear it in the front, when I think twice about throwing and put my hand on it, it looks like a beanbag or something similar. Had a few comments in years past as to why I didn't throw because someone (coach or player) saw me reach and decide better. Haven't had that question in a long time--though more than likely that I don't reach anymore unless I'm really pulling but the white helps reduce the perception of second-guessing in my opinion.

I have been taught to also sky flags which are fouls at the snap but are live-ball such as illegal formation, illegal motion, USC, sideline warnings to be sure that both sides see that something did happen because just dropping it at your feet can be seen by one sideline but not by the other if the field has any crown. I will throw flags toward the foul against a defensive player just like an offensive player just as Bob M. suggests because that helps later show better who committed the foul and about when it happened so it is easier to review on film.