Interesting idea.
When creating a villain, the main thing one must consider is the characters motives. To simple be the embodiment of evil is not really trying. Once you have a good motive, it is easy to go from there, I would say. It is also a good idea to avoid cliches (black cape, evil grin etce) unless it is supposed to be a parody, of course.
Sauron, for example, is very good as a villain. A disembodied spirit of malice who is represented though his servants rather than his own presence. Saruman, again an interesting character with great motives. There are many in Tolkien that are good. Even ambiguous figures like Old Man Willow have their reasons for being bad.
Besides which, setting it in a fictional world means you can explain away almost anything.
