You might want to see if you have slop in the wrist pins, as far as the knock goes.
The other thing you mention, I believe is a “lock out” so you can’t engage the starter rope
if the throttle is too far open, and most likely in gear.

Does the engine knock when you run it? Generally, you will hear a knock at dead idle, but it will go away when you advance the throttle if slop is an issue. I know you said it runs a little rough, but does it knock? Sometimes powerheads will have a little “clunk” when rotating past TDC to with no plugs installed…You can always use a little wooden dowel to check for wrist pin/rod slop. Simply rotate one piston about half way up its compression stroke, then back the flywheel off slightly. Now, used the dowel to attempt to push the piston back down, you will feel some sliop and hear a clunk if there is wrist pin/rod wear… Repeat this process with the other piston….
I just don’t want you to condemn this engine needlessly….D

OK, so you don’t really feel much slop in the wrist pin/rod. The little tick could just be sideways slop/clearance between the piston and cylinder, which is normal for these engines. You don’t hear any ticking/knocking at idle so I’m thinking you are OK. As for the recoil, yeah that is a tough job without the special tool to rewind and install the spring. Please be very careful, wear safety goggles while attempting to get the pulley pin into the spring eyelet. It’s hard to prescribe a method of doing this, you might have to bend the spring inwards just a bit to help line it up. Please be careful, don’t get hurt…
It’s hard to pinpoint gearcase leakage issues without pressure testing. It’s not too bad if the oil is just milky, provided no raw water drained out of there. Just change the gear lube more frequently. Make sure each drain plug has one, and only one gasket on it, perhaps this is all that is wrong…