re: Also how do you cut out inside a vector leaving a hole?
In Illustrator; The hole object should be on top. The shape object should be below. Select the shape object, then the hole object. Select the menu item "object > compound path > make"
This SHOULD create the hole. The shape object can't be a group... just a single object... if it's a group, it won't work correctly.
RE: Layers
You can merge layers down OR, you can group layers into folders (that's what I usually do) Find these options in the layer pallette.