First thing you need to do is sit down and decide what you want in your studio.
In no particular order here are some things to consider:
Design Wall
Stash storage
Light table or box
Computer work station if you use a computer design quilting program
Cutting table
Sewing machine cabinet or cabinets
Sitting area
Dedicated task lighting
Overall lighting
Once you have decided what you want in your room, sit down with a sheet of graph paper and make a plan of your room. Once you make a plan start working on the room. Standard construction technique would be to do any repairs to the structure first or any add on like more windows, doors, etc. Once the structure is in it's final configuration then do your drywall and painting. I recommend drywall over paneling unless you use a very light panelling because dark panels make it seem like a morgue. Once you have everything painted then do your flooring. One of the problems that you usually have in garage is that the base floor is sloped and you either have to build a small platform or level it in some way. You should not have any problems with code enforcement, unless you do major exterior remodeling.
In an extended time frame project like this it's very important to have a plan to work from. Without an initial plan you tend to lose focus on the vision you had so many months ago. I've done quite a few remodels, both personally and professionally, you need to know where to start in order to get to the finish.