Version Control with Subversion covers many fundamental version control concepts in addition to being the authority on Subversion itself. If you read the first chapter, you might get a good idea on how to set things up.
In your case, it sounds like you're making the actual development on the live system. This doesn't really matter as far as a version control system is concerned. In your case, you can still use Subversion for:
- Committing as a means of backing up your code and updating your repository with working changes. Make a habit of committing after testing, so there are as few broken commits as possible.
- Tagging as a means of keeping track of what you do. When you've added a feature, make a tag. This way you can easily revert to "before we implemented X" if necessary.
- Branching to developt larger chunks of changes. If a feature takes several days to develop, you might want to commit during development, but not to the trunk, since you are then committing something that is only half finished. In this case, you should commit to a branch.
Where you create a repository doesn't really matter, but you should only place working copies where they are actually usable. In your case, it sounds like the live server is the only such place.
For a more light-weight solution, with less overhead, where any folder anywhere can be a repository, you might want to use Bazaar instead. Bazaar is a more flexible version control system than Subversion, and might suit your needs better. With Bazaar, you could make a repository of your live system instead of setting up a repository somewhere else, but still follow the 3 guidelines above.