The Electronic Frontier Foundation wrote a pretty good blog post on the legality of the Fediverse, around the time Mastodon was getting popular. It probably applies to Lemmy too. It’s worth a read to familiarize yourself of what kind of legal things you’ll be getting yourself into. You’re on the right track; you can control you and your friends’ content, but you can’t control remote content that gets pushed to your server and that’s the part to worry the most.

https://www.eff.org/deeplinks/2022/12/user-generated-content-and-fediverse-legal-primer

One thing that stood out is to register yourself as a DMCA agent. It costs $6 or something. Having an agent on record gives instance admins certain protection.

Text is copied to your instance's database, but any images are hosted on the other instances and simply linked to. Worst case scenario, you get told to delete something that's illegal in the country in which you host the instance, you comply, and everything's peachy.

Edit: That being said, I'm currently hosting an instance for myself and a few friends, and it's been smooth-sailing. Just make sure to require email verification or admin approval for new sign-ups (or disable them entirely) if you don't want to be overrun with bots.