1. If the arms are not fused with the main body, then you just need to move the arm bone around. There's a "Co" button in the "armature bones" panel which you have to uncheck, then the bone isn't connected to the parent bone anymore.
2. It's easier to model that stuff as separate meshes or objects, but to optimize the model I'd delete the vertices below the armor/cloths which will never be visible. Maybe you can even merge the two meshes, but that depends on the models. Boots for example could be easily merged with the legs.
3. I like to use the reprojection in Sculptris atm (the new Blender versions have that function, too). The program takes a screenshot which you can modify in a painting program and then reimport in Sculptris/Blender.
To make the colors of your texture more interesting you can add layers in different blending modes like "hard light" to modify the color at some spots a little bit. Some nice, big brush tips are also useful for texture painting.
There's also projection painting which lets you project textures directly on the model, similar to a clone brush.
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I'm currently working on some spaceship sprites for another game again. When I'm done with that I'll continue to work on the orc (probably
).