"I live in a small village."
Using "chiisana" is just another way of describing a noun. Unlike how "chiisai" is a regular adjective where it can be used either before or after its noun and is conjugable, "chiisana" can ONLY be used before its noun and is not conjugable.
Chiisana: 彼女の小さな手 "her small hands"
Chiisai: 彼女の小さい手 "Her small hands" / 彼女の手が小さいです "Her hands are small" / 彼女の手が小さかった "Her hands were small" / 彼女の手が小さくてかわいいです "Her hands are small and cute"
Adjectives are either い-adjectives or な-adjectives. A majority of the time い-adjectives end with い and な-adjectives don't. But please do not depend on this "rule" as there are a handful of irregular adjectives. In these special cases, an adjective ending in い might seem like an い-adjective but in actuality be a な-adjective. Example: the word for famous: "ゆうめい" ends in い but is actually an irregular な-adjective. You just have to memorize these special exceptions.
Now that that is out of the way, lets continue.
い-adjectives are placed directly in front of a noun and need not addition or modification. Example: たかい人 or "A tall person" (たかい + person).
な-adjectives must have a な placed after them when used before a noun. Example: べんりなスーパー or "A convenient supermarket" (べんり + な + supermarket)
I hope this helps.
You use に rather than で to explain where something exists. In this case you are existing/living in a small village, so you need to use に.
Chiisana mura ni sunde imasu.
I live in a small village.
Chiisana mura de hatarakimasu.
I work in a small village.
In the second example, you are doing an action in the village, so you use で.