Keep in mind that this limitation only on beehaw.org
Other Lemmy instances such as allow you to create communities freely. For example lemmy.ml or sopuli.xyz
The way federation works is that as a user of one instance you can read posts and comment from and to any other instance. That is how I can reply to this post even though my account is on lemmy.ml
What is not federated yet is community creation. Currently you can only create a community on an instance you have an account in and it so happens that beehaw on which you are has community creation disabled.
The idea is that it should not matter too much which instance you join, but you'll find a few differences between instances such as the ability to create a community or not, the existence of downvotes, etc...
I'm not sure those two settings should be compatible? If it's a private instance then it means it should not federate.
I guess it was an oversight regarding breaking changes. What error did you get? It might help some people who're experience similar problems.