Info from Wikipedia
It was founded by Michael Dorf and Louis Spitzer in 1987. The Knitting Factory was named by Dorf's and Spitzer's childhood friend Bob Appel and songwriter Jonathan Zarov, who derived the name through joking about Appel's experience working in an actual knitting factory. Appel, a lifelong musician, joined as a co-owner and co-manager soon after its founding. John Zorn was heavily associated with the creative direction of the club in its earliest years.

The original location was in Manhattan at 47 East Houston Street, near to CBGB and within walking distance of The Bottom Line. The venue was founded as an art gallery, with a performance space and cafe, as well as a home for experimental music.

Within a few years, the venue relocated to a new Manhattan location at 74 Leonard St, which featured a much larger main hall that generally showcased independent rock and pop music, and two smaller subterranean stages that were initially dedicated to avant garde music.

In July 2008 the owners announced their move to close the Manhattan location and move to a much smaller space in Williamsburg, Brooklyn at 361 Metropolitan Ave.