jlsparks-
Either way will work, but it really depends on what exactly you want to do with it.
Most commonly it is drained overboard through the side of the hull for simplicity's sake.
If used for a fish live well, bait well, or fish box, the out the side system works best because draining fish parts, scales, blood, etc. into the engine well is an unnecessary complication.
Are you going to use it as a live well?
Or do you want to use it for storage? Battery holding?
Does it fill up with water from condensation, boat spray, or boat washing?
Do you need to better seal the hatch cover?
Here's a
LINK that discusses the topic of live wells and drains.
Here's a
LINK to a discussion of water in the lazarette and how to deal with it.
Joe.