From MozillaZine Knowledge Base
In Thunderbird and SeaMonkey, "Local Folders" is the name given to the set of mail folders at the bottom of the folders pane. Many new users don't know what these Local Folders are for, or why they're called "Local Folders". It's called a "special" account because it doesn't have any instructions for how to communicate with a mail server.
Really old versions of Thunderbird used to create all of the standard folders you'd expect in an account in Local Folders but nowadays it defaults to just a Trash and Outbox folder. If you configure a POP account to use the inbox folder in Local Folders (a Global Inbox) it will create the inbox folder if it doesn't already exist. Outbox is a special folder used to queue messages when you use Send Later rather than Send. The Outbox folder is used by all accounts.
Uses for Local Folders
Renaming Local Folders
To change the name of Local Folders, just right click on "Local Folders" in the folders pane, choose "Settings", and then in the dialog that pops up, enter the new name in the "Account Name" field. Alternatively, you can go to "Tools -> Account Settings" (in Thunderbird) or "Edit -> Mail & Newsgroup Account Settings" (in SeaMonkey), then click on "Local Folders" in the left-hand pane, and type in the new name in the "Account Name" field.
Moving the storage location for Local Folders
Getting rid of Local Folders
The best solution is to keep Local Folders collapsed in the folder pane and ignore it.
You could edit the prefs.js file file in your profile folder per  or  to get rid of it. That works, but it requires you to understand how account settings are stored in the prefs.js file and any mistakes can seriously mess up your profile. If you try it, be sure to back up your profile first. Hiding it using an add-on such as Hide Local Folders would be much safer than deleting it.
Local Folders lost during an upgrade
If your local folders are missing after upgrading Thunderbird (and you didn't deliberately get rid of them) set the advanced folder view to All Folders using View -> Folders -> All. If they are still missing something probably deleted its account from the list of known accounts in the mail.accountmanager.accounts setting.
Type mail.accountmanager.accounts in the edit field in the Config editor and see how many account ids it lists. For example if you have two POP accounts and they're set to account4,account3, Thunderbird only knows about two accounts. It should know about three (two POP accounts and one local folders account).
If the count is wrong: