Hey Justin,
>> "1) Can I distribute only the excel file (*.xlsm)? The documentation suggests I may need to distribute a dll file. Distributing just an *.xlsm file is easier."
You'll need to include the dll and .dat file as well. Create an installer (use InnoSetup for a free one).
>> "2) I assume that I'll need to encrypt my Macro."
Or, just use the password functionality built into Excel. Google for examples.