I finished this game a few months ago and it was great, so I wanted to get back into the game and play through it again with a friend, so I'm just wondering how good is the multiplayer/co-op in this game? and how does it exactly work? (like with pausing combat and whatnot)

You can set it so all players can pause, or make it so that only one player can pause. Auto-pause works for every player.

The first character in the arbitration screen (when you create or load a game) is the bhaalspawn, and only he gains bhaalspawn powers (be these the ones from BG1 or SoA). This will most likely also affect deck of many things / machine of lum the mad as well (haven't reached Watcher's Keep in multiplayer yet).

The biggest 'problem' in multiplayer is the unpause delay, which means you can't unpause the game after a pause until 1-2 seconds have passed (I guess to prevent people unpausing accidentally when both pause at the same time).

All players need to have identical installs (in regards to mods, patches etc).

Personally I would recommend three players/characters at max, any more and it becomes a mess (especially with pausing), and make a point to never unpause unless you initiated the pause. Voice comm is pretty much mandatory.

Having the slower reader (in regards to dialogue) as the only person who can 'talk' is probably a good idea (you can set action permissions in the arbitration screen), unless you plan on skipping dialogue.

Here's a post that explains the basics.

Personally I recommend hamachi for playing the game in multiplayer.