If someone made a request of me like the one you've received, the very first thing I'd do is find out if there is a photographer already on contract with the school. I'd be surprised if there isn't, frankly.
You're going to need to work closely with the school, anyway. Even a public school will exercise a lot of control over who comes on the grounds and makes photos. This may or may not apply to a "festival" held on school grounds, or even a school sanctioned event off site.
One thing that's become all too common lately is that the school expects a "donation" from photographers they contract with. This might be a set figure, or a percent of sales. Either way, it's ugly and something I wouldn't even bring up... until they do. In most cases I'd walk away from any situation requiring me to "pay to shoot". This has happened due extreme competitiveness... New photogs trying to "break in" to the business offering ridiculous "kickbacks" to win the contract. It's a horrible precedent that's been set and is seriously undermining everyone's profits. A flat fee puts all the risk back onto the photographer, that they will make enough sales and profit to cover that cost. A percent of sales deal means "opening your books" to the client..
Back in the days of film it was the other way around. Photographers commonly got a flat fee up front that basically covered their costs of materials and processing. Now there is a perception that "digital is free" (nothing could be farther from the truth) among both clients and newbies. If they survive a while in business and gain some experience, hose photographers figure out that digital ain't even close to free, tha' it's at least as expensive as it was shooting film, maybe more-so since there's a lot of pressure to upgrade expensive equipment fairly frequently in order to stay competitive.
As to an online service, one that hasn't been mentioned yet is Printroom.com, which is headquartered in Santa Clara. This is who I've used for three or four years now. We tried Smugmug some years ago and were disappointed in the print quality... But I've heard they've improved so this might not be relevant any longer. I don't have experience with the other services mentioned, but am sure they are similar to Printroom.
I charge $7 for 4x6, $10 for 5x7 and $20 for 8x10 and am in the N. Calif. area, same as you. My prices are pretty typical for events (sports) here. Some charge more (some a whole lot more, or at least they try to). Some charge a little less. Wedding prints might run a little higher, or might be in the form of a package instead of ala carte pricing.
Regarding a business license... It's local, not state. Most places the local city issues business licenses, unless you are in an unincorporated area and then it might be the county. In San Jose, for example, it's over $200 a year for a biz license now, assuming you have no employees (higher if you do). If a business brings in less than $20,000 gross per year, you may not need a license and can get a "waiver". But, the waiver costs about $40 or so, if memory serves. So they'll "get you" one way or the other. Just check with your local city about biz licenses.
The FTB or Franchise Tax Board is all about sales taxes... Which is an entirely separate issue from the business license. If you will be making sales directly, you'll need a number, bank account, etc. to collect sales taxes and make regular payments to the city, county and state. You can avoid this by working through a vendor such as Printroom, who collects the payments, including the sales taxes.
Using a vendor also allows you to avoid having to get a business account to accept credit card payments. That's another very real expense.
But, of course, a vendor like Printroom, etc., collects an annual fee and a significant percent of sales. So, you end up paying for these anyway, but it's much more manageable for small, side businesses, than going out and setting up your own accounts.
And, using a vendor like this doesn't mean you don't need a business license.... Technically you still do.
The exact costs and requirements of setting up a business - license, sales taxes, etc. - vary a great deal from place to place. What I've cited only pertains to the city, county and state where I live. Anyone considering a business anywhere else will need to gather information locally and likely will find many differences.
There are still other considerations such as the specific business structure you set up... sole proprietorship, an LLC or Limited Liability Corportaion, etc. and whether or not you operate under your own name or another business name (fictitious) which might need to be registered with the state (in my area). Seek local input and advice about these from lawyers and accountants who are experienced in small business requirements.
As to the business model... Well it's a more and more crowded field. There are lots of people out there with kit cameras doing it "for the exerience" or "to build up their portfolio"... More and more every day. Print sales right now are running about 1/2 or less than they did a couple years ago... Partly due to the economy, but also because more and more people are simply bringing their own cameras to events and shooting it themselves. It used to be rare for me to see a DSLR at an event... Now it's not surprising to see 2, 3 or even a dozen or more people shooting with them, depending upon the size of the event. Nearly everyone has at least a camera phone or point & shoot. Some are so proud of their work that they photograph everyone, post their stuff online at free sites like Flickr, and offer free prints to anyone and everyone who wants them... It's pretty hard to compete with "free", I can tell you from experience.
The only way to get any competitive advantage over all this is to gain exclusive and unusual access, and then provide products that "mom and dad" most likely can't make for themselves. You'll need to work closely with organizers for the access, and you'll need more professional photo equipment (and the knowldge to use it well) to achieve these.
As with any new business, you'll need to "feed it" for at least a year or two. In other words, it will run in the red and be a cost to you rather than an income generator. That's just the nature of new businesses. How long before it starts to turn a profit varies with the type of business. The more competitive the market and the lower the profit margins, the longer it will run in the red and the more you will need to feed it up front, to get up and running.
There are other costs involved, too... Insurances (equipment, liability), accounting, taxes, equipment and supplies, etc.
Once you make the transition from amateur photographer to professional, you will find that most photo businesses tend to be 80-90% about your skills in business, 10-20% about your photography talents. You have to love keeping books, problem solving and meeting challenges in creative but efficient ways, in addition to the joys of photography itself. You need to think like a CEO, attorney, accountant and marketing executive, in addition to being a photographer.
I'm not saying "don't do it".... This might be great for you and a lot of fun. Just go in with your eyes wide open. This opportunity may be a good way for you to give it a try, to see if there's some real potential.
