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* if you sell the yarn you would need to pay taxes on the profit you paid between the purchase price and the sale price. If you give it away to a 501c3 non-profit you can deduct the value of the yarn off your taxes as charitable giving (the value could be their retail price)
* generally speaking you can re-label a product so long as you do not trademarks of the brand name to suggest that the repackaging was done by the brand and not by you. So you could create a generic label saying 2 yellow yarn balls made by XYZ, 3 red yarn balls made by ABC etc. But I would not imitate the look of a 'real' label
* You don't have to become a company to do this. You can be a sole proprietor. But be mindful that as a sole proprietor you do not have limited liability protection and it would be difficult to deduct certain operational expenses off your taxes.
* under the 'first sale' doctrine it is permissible to re-sale all product that is genuine and that has been purchased legally.
In conclusion, you will pay taxes on the profits, you can create your own label and reference the original makers of the but do not create a label that may be confused with the manufacturer's label, and under the 1st sale doctrine you are permitted to resell.
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