1.) They prevent edicts. If a client state exists in one of your provinces you can't issue edicts because you don't control 100% of the province.
2.) They hold back provinces by limiting what you can build. You can't control what your client state builds, and even if you could, their building do not contribute to your province.
3.) I don't think the income from the client state tribute is significantly higher than what you would earn from directly controlling their settlement.
4.) It's impossible to diplomatically assimilate them into your faction. They will forever maintain their independence, no matter how long you rule over them.
5.) Client state or satrop by conquest; they will hate you for the war, for the conquest, and for the occupation of their city.
1.) Their last one or two settlements are a considerable distance from your borders. It might be better to take what little you can get by forcing them to become a client state to avoid thinning out your forces to capture, and then defend their settlements.
2.) You need to end a war. If you are fighting wars on multiple fronts and need some relief, this might be a better option than a simple peace agreement.
3.) If you create a client state out of a peaceful faction without conquest or war, they will not have these negative modifiers.
4.)They do give you a positive modifier for treaties with the faction when you create a client state. There is a balanced and logical diplomacy system.
Question 1: Yes, but you are very limited to what you can build.
Question 2: Yes, they can break their status with you if you do conquest by violence however they are very unlikely to do that even when they hate you.