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I am building a Virtual Machine with SharePoint 2010 Server and SQL Server 2012 installed for a testing environment. When running the SP Configuration Wizard, I hit an error regarding the server farm. It does not recognize the database I created, and it does not allow the user accounts on the VM since they are local and not domain.

I need to connect to my local setup a server with Active Directory. Can/Should I connect my physical Domain Controller to the virtual server, if it's possible?

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Typically, you have to join your VM to the designated Active Directory first before installing, and make sure you are logged in using Domain's Active Directory account (designated as SharePoint Farm account) when you installing it and configuring it. This may require Domain Admin's account credential when you try to join to Active Directory.

Because once you've joined to the Active Directory, it will just give a DNS cache to your VM and the setup will just run easily with Active Directory's user. Database will be created under that account, database name will quickly resolved (since database is in your local), SharePoint Service also will be running under that account.

There's a way though without joining to domain account, by installing using SQL authentication as described in HERE. But as always, there'll be some limitations.

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