how do I start out as something other than imperial?

You have to research the more advanced gov't types. You always start with an Imperial gov't and can research Federation and Democracy.

don't forget republic too and you change governments in the button at the bottom that looks like a line graph.....

When you set up your race, pick as many of the political technologies as your can (with your meger 200 pts you should be able to get one or two at the expense of all the ones you really need...) and then go great guns researching republic/democracy and star federation... By the time you get Star Federation your friendly neighbourhood evil race should be knocking on your front door....

I must be missing somthing obvious in the game set up. No matter race I choose and how I try to modify it I can never start as a Democracy or Federation. What am I doing wrong? Also, I can't seem to change my gov't. type, even when the approval is 1%

The game is designed that way. Every civilization starts out Imperial. The government tech tree goes something like this Link:

Xeno Communications
Universal Translators
Interstellar Governments
Alliances
Interstellar Republic
Star Democracy
Star Federation

Fair warning - This will make the game VERY EASY and it is cheating.

Create your custom race. Save it and remember its name. Go to mydocuments\mygames\galciv2 right click and edit the file named (yourracename).raceconfig. look for the lines that are flagged Tech, create a new one

[Tech]StarFed[Tech] only with greater than and less than signs instead of ] and [.

Save the file.
Start a new game and see if it worked, it should. As soon as the game starts bring up the civ manager screen and change your government type to star federation.

Disconcerting to know we will be a dictatorship in the future.

Its not that each planet is ruled under an imperial system, its that the galactic civilization as a whole is an imerial system. Each individual planet is probobly running under its own government and reports to a central authority that has absolute power.

You need a very high approval, 1% is terrible, and you must research them all.

Yeah, what's with 1% approval? You can't build any kind of empire with that rating at all...your gov style won't even matter if everyone hates you anyway.
Also, you can set any starting government you want if you play a custom race.