I want to be able to work on my site without affecting the live portion, but some threads I've read make it seem like I need an entire second license to set this up? Am I understanding this right? If so, how do people work on their site without doing it live or taking the site offline?

You only need one license for this, however most things you can do on your live site, and just use permissions so only you the admin can see them etc, if you need a test dev site, then you can set one up on a local server etc, just enter your license number followed by -TESTINSTALL to the key.

Ensure the site is not available to the public as well, it must be protected via htaccess or be local only etc.

-TESTINSTALL

It says the same thing Rhett noted above... Just in Guide form.

Hey guys thanks for the answers.

To follow up, I've setup WAMP, copied all my /forums/ files to my c:/wamp/www directory, and imported my sql file.

HOWEVER, I'm still getting a 500 Internal Server Error and I think it's because of the -TESTINSTALL issue above. Where is the KEY file located? Or do I have to perform a fresh install and put that info in along the way?

It wouldn't be related to the key, you would enter that in the admincp after the site is restored. Check your web server error logs for the cause of the error, a quick guess is permissions

Can I copy/paste my file directories & my spl info to my local server? Or must I first install a vanilla IPBOARD to the server, then copy files over?

figured out my issue - My HTACCESS file was messing up everything.