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Until I decided I just had to have graphics in my Sony eBooks, I also used RTFs for the Reader.
My favorite settings were Verdana font at 16 points (it reads much smaller in the Reader, believe me), half inch margins all the way around, with page breaks at each chapter (as well as the "normal" places, like title page, author page, etc.) And when I include block-quoted text, I generally indent only an additional 1/2 inch.
But really, you've just got to experiment to find what works best for you. There really isn't a "right place". These aren't like PDFs where the (old firmware) only displayed the page as a picture. Your Reader will reflow the text, so your margins and paragraphs and page breaks are your own.
As you read around this forum, you'll find we have disparate tastes! Some insist on full justification, some despise it. Some go to great lengths to convert plain punctuation (i.e., straight quotes, regular dashes) to fancy (curly quotes, m-dashes), others specifically strip out the "fancy". Some think page breaks at each chapter is a hold-over from print books, others still want that break.
When I first started converting books for eBookwise (my first ebook reader), I spent quite a bit of time making test files. Different fonts, different font sizes...single-spaced, double-spaced...narrow margins, wider margins...etc. I finally settled on one I liked, although I'll admit I fine-tuned it over the years. Sometimes when I get around to reading a book I converted a few years ago, I'm surprised by how much my formatting decisions have changed!
I'm trying to remember any "don'ts"....Sony Reader won't recognize your header/footers in RTF files. The eBookwise will let you mix font faces, but I don't think the Sony will... I had abysmal luck trying to get links saved in an RTF (i.e., a TOC) to work, but that might have been with the eBookwise, so I may not have bothered to try in the Sony.
Good luck - and have fun with your Reader!
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