This table of names and the files to which they refer is generally called a directory. In recent years, distributed network authentication databases have appeared, initially in Banyan Vines and Novell NetWare 4. Unfortunately, these are also called directories. Since then, Microsoft has gone over to calling filesystem directories 'folders', but the old term is still commonly used elsewhere in filesystem discussions, and we will use it here. On a traditional FAT volume there is one special directory, the root directory.
Subdirectories work the same way.
They are ordinary files with the directory attribute set containing the same structure. But unlike the root directory, they aren't limited in size and can grow to contain more entries. The FAT filesystem is simple and functional but error-prone. There are other problems with the FAT filesystem, too. Not only are eight-character names restrictive, but the extensions system is the only official way of assigning file types.