Cohorts are creatures that, for one reason or another, are with the player characters during an encounter. They count as part of the party when calculating overall Encounter Level. We must emphasize this, since cohorts can dramatically alter the circumstances of a battle and therefore affect the calculation of an encounter’s difficulty.
Remember that since most skill checks (aside from individual uses in combat as part of a character's actions) can be made by a single character and applied to the entire party, and a party of 3 characters can easily cover all of the bases in terms of skill selection, the addition of extra characters with lower skill modifiers to an already-large party generally has a relatively minuscule effect on encounter balance in non=combat encounters.
The GM, of course, retains discretion whether or not to increase the encounter difficulty if the player characters find a temporary cohort. However, we strongly suggest that temporary cohorts at least access a proportion of the encounter rewards. Simply having a cohort or cohorts should not be a guarantee of steamrolling encounters for cheap loot.
Since cohorts are effectively additional lower-level characters controlled by the players, they can substantially increase the time it takes to resolve combat encounters. GMs who are strongly concerned with speed of play or who are GMing for large groups (particularly groups with 6 or more players) should therefore probably avoid the use of permanent cohorts and may wish to restrict access to temporary cohorts. Additionally, cohorts are usually too much work for beginning players, as beginning players have often not yet learned to play a single character.
On the other hand, cohorts offer a great deal of utility to small groups (such as solo campaigns or groups with only 2 or 3 regular players), and to experienced players who understand and can deal with the mechanical implications of cohorts.
Some basic rules apply to all cohorts. The first, and most important, is that cohorts are always at least one level lower than the player characters. We instituted this rule for a number of very good reasons – most importantly, it keeps the story centered around the player characters instead of leaving the player characters overshadowed by an NPC used to advance the plot and create non-interactive "cutscene" play. Additionally, the purpose of creating cohort rules is to duplicate the concept of "leadership," "mentorship," or supply the PCs with dragon mounts and similar awesome things. There's simply no point in having the PCs be in charge of characters that are more powerful than they are, and NPCs that are employing the PCs or otherwise in charge of them should generally be kept off-screen except to provide instructions and quest rewards.
The second rule of cohorts is that a player character may only have a single cohort at any given time.
Finally, cohorts should never be more than 3 levels lower than the players, and 2 levels is generally an unusually wide gap for a permanent cohort. Creatures who are substantially lower-level than the player characters are extremely vulnerable to area effects and the roleplaying value of a permanent cohort cannot be maintained if the cohort is functionally just cannon fodder.
Temporary cohorts are allied to the player characters via short-term bargains, common enemies, or occasionally pure happenstance. Generally speaking, a temporary cohort will not remain with the PCs for longer than a single [Scene]; certainly, a creature remaining with the PCs for an entire [Quest] is in the process of becoming a permanent cohort.
Temporary cohorts do not automatically gain levels when the players do (although at the GM’s discretion, they may level up before, with, or after the players). If the GM and players decide that a temporary cohort has become permanent, and the cohort was 3 levels lower than the players, it immediately gains at least one level (and, of course, no more than two), so that it is within the level range for a permanent cohort.
Temporary cohorts can be asked to participate in social encounters on the player characters' behalf, but are under no compulsion to do so (indeed, additional negotiations in the form of an extra social encounter might be necessary to gain such a service).
Permanent cohorts are friends or apprentices of the player characters. It is the job of the GM and the players, collectively, to figure out what these motivations are and to make them work. Permanent cohorts will generally remain with the player characters for at least an entire [Quest] and usually across multiple campaign arcs.
A player character may trade a magical item or items with his or her cohort, on a one-for-one basis, assuming the cohort has a magical item of the same classification and is willing to exchange the items (in some cases, creatures grow attached to their items and aren't interested in a trade). The two characters simply attune to each other's item for as long as they wish to continue the swap. A player character who gains a permanent cohort qualifies as having a cohort for any feat or item that requires having a cohort.
Permanent cohorts automatically level with the players. They loyally serve the players unless they are obviously betrayed in some way. It is possible for extreme requests to meet with refusal or even alienate cohorts to the point of leaving the players.