[RPG] Can two characters occupy the same square if one is prone

Not really, no.

Being size small has few, if any, direct benefits. Theoretically the small races (halfling, gnome) receive sufficient other benefits to balance out being size small, but it's primarily a sacred cow from 3rd edition (note that dwarves are not size small).

With minor situational exceptions:

Weapons with the Goblin Totem enchantment give an item bonus to damage against foes larger than you. Since most non-minion enemies are size medium or bigger, this becomes a very cheap way of getting a scaling item bonus to damage; it's much less reliable for non-small characters, since medium enemies are relatively common. Goblin Totem is useful for some builds (particularly relatively un-optimized ones), and despite being situational (the advantage over medium characters is only against medium foes) it's probably the best (if not only) benefit to being size small. Edit: There are other items/feats that provide a bonus against creatures larger than you, but not many.

You can move through the spaces of size large enemies (the rules say you can move through the space of any creature 2 or more sizes larger or smaller than you). You still provoke attacks of opportunity during this movement, but the potential positioning advantage over large enemies makes this one at least a little useful.

You can fit in smaller spaces without having to squeeze (assuming that's something that comes up in your game? maybe if you're fighting kobolds). By DM fiat, you may have an easier time taking cover, but there's no official rules to support this.

Small characters can use size medium creatures as mounts, but since mounted combat is usually a poor choice in 4e, and most of the methods of acquiring a mount that levels with you range from mediocre to atrocious from an optimization standpoint, the benefit of that capability is minimal.