I think Mandarin would be a "good" villain to use in the sequel not necessarily the best choice in my opinion. Just because of the whole magic aspect of Manadarin's power. After all Iron Man is the most "realistic" of the all the comic book movies. It would be nice to Mandarin's ring explained more scientifically, like if it was more like a power glove weapon of some sorts.
If they don't use Mandarin as the villain, then I would like to see Ultron as the bad guy. That way, more of the Avengers character could be introduced. The military inspired or afraid of Iron Man hire Hank Pym (Giant Man, Ant Man, Yellowjacket) and his wife Janet (Wasp) to create a similar weapon but that is completely controlled my the military. So Hank Pym creates Ultron, but due to his AI brain being distorted by a corrupt governmental offical or Mandarin himself, Ultron develops his own agenda and goes on a rampage. It is up to Iron Man and Shield to stop Ultron and Mandarin!
DAMN I'M GOOD!!! I should write the sequel!!!!