The dedicated server is for running a server over a long period of time, without needing to use a full installation of LFS. It's typically used on lower power machines where you don't need or want to run a complete LFS installation.
If you just want to create a server for arsing about with your friends then you don't need to use the dedi, and you can use a full LFS installation (Multiplayer > Start New Game).
If you do need to run the dedi, then everything is controlled through config files. The default is setup.cfg. This is just a text file which you can edit with notepad.
Each server name must be unique, which is why you're getting the "host is already online" error.
However, no matter how you setup a server, you need to go through the same steps to prepare your network to allow people to connect.