1. A paladin and 3 ele and 1 resto shammie works great in PvE, you'll be able to do more or less all 5 man content in the game. As for PvP a group of 1 holy paladin and 4 ele shammies works great. or just drop the paladin when you are pvping.

2. I have tried both hardware and software boxing, and I personally think that software boxing is the superior option. It does require a better system though, but you can take advantage of PiP, so it will be easier to switch your main for collection quests and stuff like that. And it is cheaper.

3. Private servers are illegal and it will not be discussed on this site. Get some trial accounts if you want to do some testing before committing to 5 accounts. Remember to follow all of blizzards rules to the letter, as a multiboxer you have much more focus on yourself, and sooner or later you will be reported. And make sure ALL of the accounts are in your name!

Good Luck.