You actually layout folder and mll should be kept separate.
If your mll file is LAYOUT 1, the actually folder containing the artwork should be LAYOUT 1.
Today I found out also, if you set up your layout and call it "X" but you want to rename it, you can simply rename the mll and folder and it will still work.
This helps me a ton when I'm doing multiple console emulators for people. I have a layout called MAME in my set up, so I can't save another as MAME.
But when I zip the file I can simply rename the emulator for the customer. I don't need to re-do the layout.