how to set up formats on illustrator for printing company

If your vendor is asking you to change the dpi on an illustrator file, you might want to look elsewhere..... ai files do not need dpi settings.....

He could be putting a raster file into AI thinking that's what's necessary.

If you start your design in Illustrator, and only use its tools it is already what is known in the industry as a "Vector" format, it's composed of shapes and points, which has the advantage of being scaled to whatever size is needed. As royster said, any graphics department that receives an AI file that is actually vector shouldn't have to ask you to scale things to a certain dpi, the only question should be "how big do you want this to be on the shirt?"

If however you take a photo with a camera, or get an image from the internet (jpeg, bitmap, png, etc) that is a "raster" image, it cannot be scaled due to all the complexities of color and detail without some loss of quality occuring.

I did originally want to do the photographs for my t-shirt but I dont really know how to go about doing that.. but anyway, so no matter what, if I create a design on illustrator, the printing company can automatically do it themselves? or theres certain things in need to change on illustrator before starting the design?

Referring to the size of the picture and dpi of course

When creating vector art in Adobe Illustrator, the art is infinitely scalable without loss of quality. So essentially, dpi does not exist. So to answer your question, yes, the print shop can adjust the size without any problem. But it's probably a good idea for you (or your designer) to make sure the art is set up to final size so that the print shop does not need to alter the artwork at all.

If you are using photographs (raster art), then you don't really need to be using Illustrator at all. You are better off using raster software, such as PhotoShop. The file type could be a PSD, JPG, TIF, PDF, etc.