As an aside, I did get past this. Turns out that when I opened terminal in VSCode, it wasn’t in the project folder. When I switched, everything worked, but I still would like to know how to specify the functions folder at the command line.
According to the source of the plugin, i don’t think you can set it as an argument but, if you have an empty netlify.toml file with the lines i mentioned above then it will create the folder with the functions in it.