diff --git a/packages/cli/src/__tests__/create-command.test.ts b/packages/cli/src/__tests__/create-command.test.ts
index 67a89d5..4127b24 100644
--- a/packages/cli/src/__tests__/create-command.test.ts
+++ b/packages/cli/src/__tests__/create-command.test.ts
@@ -73,33 +73,164 @@ describe("create command", () => {
   });
 
   it("creates git-repo docset", async () => {
-    const cliPath = join(process.cwd(), "dist/index.js");
-    const cmd = `node ${cliPath} create --preset git-repo --id react-docs --name "React Docs" --url https://github.com/facebook/react.git`;
+    const { createCommand } = await import("../commands/create.js");
 
-    execSync(cmd, { cwd: testDir });
+    const originalCwd = process.cwd;
+    const originalLog = console.log;
+    process.cwd = () => testDir;
+    console.log = () => {};
 
-    const config = await fs.readFile(configPath, "utf-8");
-    expect(config).toContain("id: react-docs");
-    expect(config).toContain("name: React Docs");
-    expect(config).toContain("url: https://github.com/facebook/react.git");
-    expect(config).toContain("type: git_repo");
+    try {
+      await createCommand.parseAsync([
+        "node",
+        "create",
+        "--preset",
+        "git-repo",
+        "--id",
+        "react-docs",
+        "--name",
+        "React Docs",
+        "--url",
+        "https://github.com/facebook/react.git",
+      ]);
+
+      const config = await fs.readFile(configPath, "utf-8");
+      expect(config).toContain("id: react-docs");
+      expect(config).toContain("name: React Docs");
+      expect(config).toContain("url: https://github.com/facebook/react.git");
+      expect(config).toContain("type: git_repo");
+    } finally {
+      process.cwd = originalCwd;
+      console.log = originalLog;
+    }
   });
 
   it("fails with invalid path", async () => {
-    const cliPath = join(process.cwd(), "dist/index.js");
-    const cmd = `node ${cliPath} create --preset local-folder --id test --name "Test" --path ./nonexistent`;
+    const { createCommand } = await import("../commands/create.js");
+
+    const originalCwd = process.cwd;
+    const originalLog = console.log;
+    const originalError = console.error;
+    process.cwd = () => testDir;
+    console.log = () => {};
+    console.error = () => {};
+
+    try {
+      await expect(
+        createCommand.parseAsync([
+          "node",
+          "create",
+          "--preset",
+          "local-folder",
+          "--id",
+          "test",
+          "--name",
+          "Test",
+          "--path",
+          "./nonexistent",
+        ]),
+      ).rejects.toThrow();
+    } finally {
+      process.cwd = originalCwd;
+      console.log = originalLog;
+      console.error = originalError;
+    }
+  });
+
+  it("creates config file when missing and creates symlinks for local folder", async () => {
+    // Remove the config file to test creation from scratch
+    await fs.rm(join(testDir, ".knowledge"), { recursive: true, force: true });
+
+    // Import and run create command directly
+    const { createCommand } = await import("../commands/create.js");
+
+    // Mock process.cwd and console.log
+    const originalCwd = process.cwd;
+    const originalLog = console.log;
+    process.cwd = () => testDir;
+    console.log = () => {}; // Suppress output
+
+    try {
+      await createCommand.parseAsync([
+        "node",
+        "create",
+        "--preset",
+        "local-folder",
+        "--id",
+        "test-docs",
+        "--name",
+        "Test Docs",
+        "--path",
+        "./docs",
+      ]);
+
+      // Check config was created
+      const configExists = await fs
+        .access(configPath)
+        .then(() => true)
+        .catch(() => false);
+      expect(configExists).toBe(true);
+
+      const config = await fs.readFile(configPath, "utf-8");
+      expect(config).toContain("version: '1.0'");
+      expect(config).toContain("id: test-docs");
+      expect(config).toContain("name: Test Docs");
+      expect(config).toContain("type: local_folder");
 
-    expect(() => execSync(cmd, { cwd: testDir, stdio: "pipe" })).toThrow();
+      // Check symlinks were created
+      const symlinkDir = join(testDir, ".knowledge", "docsets", "test-docs");
+      const symlinkExists = await fs
+        .access(symlinkDir)
+        .then(() => true)
+        .catch(() => false);
+      expect(symlinkExists).toBe(true);
+    } finally {
+      process.cwd = originalCwd;
+      console.log = originalLog;
+    }
   });
 
   it("fails with duplicate ID", async () => {
-    const cliPath = join(process.cwd(), "dist/index.js");
-    // Create first docset
-    const cmd1 = `node ${cliPath} create --preset local-folder --id test-docs --name "Test Docs" --path ./docs`;
-    execSync(cmd1, { cwd: testDir });
-
-    // Try to create duplicate
-    const cmd2 = `node ${cliPath} create --preset local-folder --id test-docs --name "Test Docs 2" --path ./docs`;
-    expect(() => execSync(cmd2, { cwd: testDir, stdio: "pipe" })).toThrow();
+    const { createCommand } = await import("../commands/create.js");
+
+    const originalCwd = process.cwd;
+    const originalLog = console.log;
+    process.cwd = () => testDir;
+    console.log = () => {};
+
+    try {
+      // Create first docset
+      await createCommand.parseAsync([
+        "node",
+        "create",
+        "--preset",
+        "local-folder",
+        "--id",
+        "test-docs",
+        "--name",
+        "Test Docs",
+        "--path",
+        "./docs",
+      ]);
+
+      // Try to create duplicate - should throw
+      await expect(
+        createCommand.parseAsync([
+          "node",
+          "create",
+          "--preset",
+          "local-folder",
+          "--id",
+          "test-docs",
+          "--name",
+          "Test Docs 2",
+          "--path",
+          "./docs",
+        ]),
+      ).rejects.toThrow();
+    } finally {
+      process.cwd = originalCwd;
+      console.log = originalLog;
+    }
   });
 });
diff --git a/packages/cli/src/commands/create.ts b/packages/cli/src/commands/create.ts
index 9e3f7ec..bf13983 100644
--- a/packages/cli/src/commands/create.ts
+++ b/packages/cli/src/commands/create.ts
@@ -26,9 +26,27 @@ export const createCommand = new Command("create")
       console.log(chalk.blue("🚀 Creating new docset..."));
 
       const configManager = new ConfigManager();
-      const { config, configPath } = await configManager.loadConfig(
-        process.cwd(),
-      );
+
+      // Check if config exists, create if not
+      let config, configPath;
+      const configExists = await configManager.configExists(process.cwd());
+
+      if (!configExists) {
+        // Create initial config structure
+        configPath = path.join(process.cwd(), ".knowledge", "config.yaml");
+        config = {
+          version: "1.0",
+          docsets: [],
+        };
+
+        // Ensure .knowledge directory exists
+        await fs.mkdir(path.dirname(configPath), { recursive: true });
+        console.log(chalk.gray("📁 Created .knowledge directory"));
+      } else {
+        ({ config, configPath } = await configManager.loadConfig(
+          process.cwd(),
+        ));
+      }
 
       // Check if docset ID already exists
       if (config.docsets.find((d) => d.id === options.id)) {
@@ -51,6 +69,24 @@ export const createCommand = new Command("create")
       config.docsets.push(newDocset);
       await configManager.saveConfig(config, configPath);
 
+      // For local folders, create symlinks immediately
+      if (options.preset === "local-folder") {
+        console.log(chalk.gray("🔗 Creating symlinks for local folder..."));
+        const { calculateLocalPathWithSymlinks } = await import(
+          "@codemcp/knowledge-core"
+        );
+        try {
+          await calculateLocalPathWithSymlinks(newDocset, configPath);
+          console.log(chalk.gray("   ✅ Symlinks created successfully"));
+        } catch (error) {
+          console.log(
+            chalk.yellow(
+              `   ⚠️  Warning: Could not create symlinks: ${(error as Error).message}`,
+            ),
+          );
+        }
+      }
+
       console.log(
         chalk.green(`✅ Created docset '${options.id}' successfully`),
       );
diff --git a/packages/core/src/index.ts b/packages/core/src/index.ts
index 7ab1fd9..8c9f1b0 100644
--- a/packages/core/src/index.ts
+++ b/packages/core/src/index.ts
@@ -16,6 +16,7 @@ export { ConfigManager } from "./config/manager.js";
 // Export path calculation utilities
 export {
   calculateLocalPath,
+  calculateLocalPathWithSymlinks,
   formatPath,
   validatePath,
   validatePathSync,