I tried to found my own kingdom by capturing a town, and I can confirm that the colour of the "personal kingdom" is red (on a game started with alpha 1, and patched to alpha 1.1). I Didn't find much problems but one, that compromize your kingdom existence : the player hasn't the "King" status. He rules, yes, but has a "relationship" to his own kingdom -I was asked if I wanted to help some of my villagers'party against ennemies, and got bonus to my relationship to my kingdom after that- , and has no bonus to the party size, nor morale. Those two (I was playing as a mercenary before, with renown and no ranks) prevent me to try this again at that time.
I haven't tried to found a kingdom with the diplomacy mod since a long time, so I don't know if those issues are from "vanilla diplomacy mod" or an error (like if we are getting the creation of a "kingdom of friends" and not founding our own one as expected).