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I have a dedicated server that I use to sell hosting to a limited amount of clients (I'm a web designer).

I'd like to setup a new Linux system using virtual machines, so that each one of my clients would have his own virtual machine.

To do this I was looking into Ubuntu VM builder. Is it any good? Can a virtual machine be setup as a server and mapped to a domain name (like How is this setup called?

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This is generally referred to as a Virtual Private Server (VPS) system. You could probably work this out with Ubuntu VM Builder, but there are systems intended specifically for this kind of setup. The Xen Hypervisor is an open-source enterprise virtualization system that's popular for this use. Some companies also use OpenVZ, another open-source system that does the same thing through slightly different means. There are also commercial client/billing management systems that integrate with Xen/OpenVZ to take care of that side of things automatically. CPanel's WHM is an example of this, although it's on the pricey side ($400+ per year), so for a small setup it would be cheaper to do this yourself.

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For a limited number of clients with whom you have a prior business relationship, I would suggest that you stick mostly with the tools bundled with a distro. But you really should compare at least two distros so that you have some standard of comparison when you look for some add-on tools like cloud management systems or control panels.

The two that I would look at are OpenSUSE 11.4 and Ubuntu Server which is different from Ubuntu Desktop.

However, if these distros seem like too much for you and you really feel more comfortable with running Ubuntu Desktop, then put Virtualbox on it. As long as the hardware is powerful enough (4 quad core Xenons or AMD Phenom X6) you can't go far wrong.

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for a proper VPS server setup, each vm would need to have its own ip address. While http can be routed by hostnames (you'd need to have a proxy server in front if you have multiple servers behind a nat i suspect), other protocols may not.

You could then use either a general purpose VM software like VMware or virtualbox in bridged mode, or a vps specific server like openvz

You could, however, run multiple domains with the same server with virtual hosts, and simply give each user his own account linked with his web directory.

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