Everybody has to use what works for them. Personally, mine is somewhere between 'character sheet' and 'on the fly'. Because of the way I think about the characters, they're literally continually fleshing themselves out and changing. After something about a character becomes 'set' in my mind, or I consciously change it so that it will 'always be that way', I write it down on a semi-bio. So, the main character has his own word document that's nearly two pages long of little notes like 'remember he's never grown a beard' and silly, seemingly inconsequential things like that. Whereas another major character has perhaps five lines: physical attributes, major personality traits, minor personality traits, planned to go in X direction, 'current' position in timeline, and minor characters have maybe three [physical, personality, notable function].