Obviously there are a lot of things that could be done with it, some people like to strive for whatever OS has the "best performance," some people (myself included) like to go with whatever will be most appropriate for the machine, or failing that, whatever the machine shipped with, and some people like to put the very latest/greatest software they can on the machines.
I typically prefer using System 7 since most of the apps that'll run well on those early powerPCs will run better under 7 than 8 or 9, because 7 has significantly lower overhead, meaning more power is available for your actual app. System 7.6 runs a nice selection of apps to boot, but really, the choice comes down to what OS discs you have, and what you think will meet your needs the best.
My recomendation is to try a few different systems on there, maybe put OS 9 on there and see if it's got everything you need and see if it's fast enough. Then wipe that and put OS 8 in and see if that has your apps and if it's fast enough. (Probably you'll use the same apps as with OS 9, and notice that the system is faster overall), then wipe that and put in System 7 (probably with 7, you'll run a slightly earlier version, like IE 5.1.7 instead of IE5.2.whatever, and find that said apps run pretty fast, at least that's been my experience.)