The physical server typically runs a hypervisor which is tasked with creating, destroying, and managing the resources of "guest" operating systems, or virtual machines. These guest operating systems are allocated a share of resources of the physical server, typically in a manner in which the guest is not aware of any other physical resources save for those allocated to it by the hypervisor.

The Guest system may be fully virtualized, paravirtualized, or a hybrid of the two.

In a fully virtualized environment, the guest is presented with an emulated or virtualized set of hardware and is unaware that this hardware is not strictly physical. The hypervisor in this case must translate, map, and convert requests from the guest system into the appropriate resource requests on the host, resulting in significant overhead. Almost all systems can be virtualized using this method, as it requires no modification of the operating system, however a CPU supporting virtualization is required for most hypervisors that perform full virtualization.

Virtual private servers bridge the gap between shared web hosting services and dedicated hosting services, giving independence from other customers of the VPS service in software terms but at less cost than a physical dedicated server. As a VPS runs its own copy of its operating system, customers have superuser-level access to that operating system instance, and can install almost any software that runs on the OS. Certain software does not run well in a virtualized environment, including firewalls, anti-virus clients, and indeed virtualizers themselves; some VPS providers place further restrictions, but they are generally lax compared to those in shared hosting environments. Due to the number of virtualization clients typically running on a single machine, a VPS generally has limited processor time, RAM, and disk space.