The Empire was originally founded by Tiber Septim (or Talos) when he conquered every land early in the lore.
Tiber Septim (or Talos) originally sarted the Empire from Skyrim (I think)
over time the empire would rise and fall but ultimately managed to keep it's grip on Tamriel over the years.
In skyrim the empire is falling apart again due to nations seceding.
Main reason for there not being just Cyrodil, It would make a lot of the lore and storylines boring. also if you think of it as when Britain a huge Empire, It may of had control and governed all the other nations but they were still seen as separate countries.
That's all I know of the top of my head but i'm sure someone more knowledgeable will answer in more detail and probably correct me on a few points
