Dark Souls 2 – Is There a Limit on How Far One Can Hollow in Dark Souls II?

In order to reverse the hollowing you need to use the Human Effigy (like you would use a lifegem), not burn it at a bonfire. This means you're able to use the item anywhere, and can save them for right before a difficult boss fight.

As of Patch 1.03, you'll regain a small portion of humanity for helping other players:

Players now receive a small portion of Humanity after successfully assisting in a Multiplayer session instead of regaining full Humanity.

Finally, there is a way to increase your maximum HP when Hollowed:

! The Binding Ring will ensure your maximum health can't go lower than 75% when hollowed. You find this ring in The Cathedral of Blue, right before entering the fog gate. It'll be in a chest to your left at the top of the drawbridge. If you are playing Scholar of the First Sin, then the earliest Binding Ring can be found in Heide's tower of flame right before the dragonrider boss fight, there is a Heide's Knight sitting in front of a chest, tackle him and you will receive the ring from opening the chest.

You won't be able to level up at all until you get past the Things Betwixt area -- essentially, the tutorial. Past that and through a narrow cave is a town called Majula.

When you first enter Majula, there is an area to the right which has a tall tower overlooking the sea. To the right of that, slightly down the cliff and by a tree, there is a green-cloaked woman known as the Emerald Herald. Once you speak to her, she will relocate to the Majula bonfire. Thereafter, you can speak to her and level up at that bonfire. Unlike Dark Souls, this is the only place you can spend souls to level up.

When speaking to her at the Majula bonfire, be sure to wait for a menu to popup. You may have to speak to her several times before the option becomes available.

As a side piece of advice, if you want to save your souls until you can first spend them, don't go down into the area with the two trolls. This is a difficult encounter for a new character. You can bypass that and come back to it later to fight them.