My Sony is the PRS-500 and is not as capable as the 505 but here are my thoughts (and welcome to the forum).
Calibre is great, free SW - check out our WIKI to DL it. BookDesigner (also a free DL here) is very good but not as easy to use.
I found that the RTF format was very good for archiving my books and can be read on the Sonys. The main drawback is the lack of TOC and image capability. LRF is now available from many ebook stores (Baen, Fictionwise - I think). The 500 has no Epub support so I don't know about it.
HTML may be good but you can end up with several files and I don't know how well that will work. I always preferred RTF for my 500.
I'm sure you'll get more answers from 505 owners.
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