Wow! Thanks artificial, your suggestion worked perfectly and it's such an easy fix! I actually kept the spaces between the paragraphs because I found it easier to read (and no guilt over dead trees) but the "remove spacing between paragraphs" did make it look almost like a real book.
Thanks Stinger for your reply. I did have the Kobo selected as my output profile and it didn't fix the formatting problems unfortunately. I'll check out your other suggestions, though I'm pretty non-tech so I have no idea what "H2/3 styles" or "TOC" are and might get kind of lost...