Lists are the Papers equivalent of folders, and can help you organize your library more easily. A reference can be located in more than one list (or sublist), and of you delete it from a list, it will not be deleted from the library.
You create a list by clicking the gear symbol next to "My Papers":
And then you can just drag-and-drop papers into that folder. You can also add a reference to a list by clicking on the "+" icon next to lists in the info sidebar of a reference and assigning it to a list:
To create a nested list (folder-within-a-folder), select the list you'd like to move into another list on the dialogue box:
Or, you can also drag a list inside another list.