gjh42:
Having your development site in localhost or a subfolder of your domain is a matter of personal taste; either can work well. The host server subfolder is exactly the same environment as the live site will be, which may be important if you are doing unusual things with your configuration. You should protect this subfolder so search engines don't find it and start indexing it as potential duplicate content. The localhost environment allows instant review of changes without fancy maneuvering and is very simple to handle.
I see no benefit whatever to having your live store in a subfolder (unless it actually is subsidiary to the main purpose of your website). Your customers would either have to type extra text to get to the store, or be redirected from the base domain to a subfolder making the site links not match the domain name.
I like doing dev on localhost, it is faster and there is no SFTP uploads to contend with, especially when installing and evaluating modules, etc. but there are always differences if you have more than 1 environment, IE missing PHP modules, different php.ini, email is different, etc., having a /test is my last chance to be sure it's right before the world finds my mistakes.
So is the bottom line
DN->public_html with the live site in there and DN->public_html/test created from the live site and DB, probably only when needed (it fast enough to set up each time I need it)
It seams no matter the approach is there anyway to avoid the last minute manual changes to the live config via the admin back end (IE another opportunity to fat finger something). DO you just take good notes or maybe DB export, merge and import?? I'm a little paranoid as the site belongs to a family member and crashing it goes well beyond losing money but at the same time I don't want to make extra work for myself either. I figured you experts must have done this a thousand times and there would be a right way and a wrong way.
Thanks for the input, still hoping others will comment with their approach.
Always best to learn from the mistakes of others