My question is should I set up the new server (2019) as a workgroup style server like the current setup or should I install Hyper-V and setup a VM as a domain controller and another VM for the file server?
This would be my recommendation since separating file print and active directory domain services roles greatly simplifies the task when any issues do arise with either.
Some general info about the migration.
The two prerequisites to introducing the first 2019 domain controller are that domain functional level needs to be 2008 or higher and older sysvol FRS replication needs to have been migrated to DFSR
https://techcommunity.microsoft.com/t5/Storage-at-Microsoft/Streamlined-Migration-of-FRS-to-DFSR-SYSVOL/ba-p/425405
I'd use dcdiag / repadmin tools to verify health correcting all errors found
before starting any
operations. Then stand up the new 2019, patch it fully, license it, join existing domain, add active directory domain services, promote it also making it a GC (recommended), transfer FSMO roles over (optional), transfer pdc emulator role (optional), use dcdiag / repadmin tools to again verify health, when all is good you can decommission / demote old one.
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