Check with your municipal officials about local zoning laws and your financial adviser about tax rules.
Caution your child about using tools safely (including kitchen appliances) and about dealing with strangers.
Suggest to your child that she create a business plan before she starts. A good plan should include consideration of the business type and whether there's a need for the product or service, necessary skills, tools and materials, start-up costs, and time available to devote to the project.
For more information on kids' businesses, check out one of the many books on the subject or go to:
Kidpreneurs (a division of blackenterprise.com)
ja.com (Junior Achieve-ment, which offers business education programs for grades kindergarten through 12)

