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Yeah I like that there is basically no penalties for having more unlike in most 4x games.
As for when you should actually make those cities, that's a bit more open ended. The game offers a lot of ways to expand your influence without actually making new cities, and making cities tends to be fairly committal due to the city cap. I will say you probably want to get a waterfront city relatively early in the game so that you can explore overseas, but aside from that it really is up to you.
And yes, you can get cities past the city cap, I just annexed (edit: I guess it's called Integrating now?) a vassal to put me over to test, then rebuilt some city ruins while already over (so I was over by two). Did not test upgrading an outpost, but I don't see why that would be any different. The economic penalties on your empire just get higher with each one.