Maybe you have done it yourself or had it done to you. You have based a character on someone you know or someone has based one on you. This habit of basing characters on people never occurs without a pronouncement to the person the character is based on. I'm not sure if I have ever heard of a person reading a story or book and then going to the author and asking "Was that character based on me?" The question becomes whether basing characters on people you know is a good idea or a problem. When discussing characters with students, I always tell them that you character needs to be a real person in your mind. Sometimes that can be a hard concept to truly grasp. That is where the habit of basing characters off of people that we know comes from. I would bet that many of the writers reading this blog have a lot of themselves in the main character of at least one of their stories. There is nothing wrong with that at all. It is certainly information that is easy for us to access and it makes the character very real to us because it is...well, us. Of course, you can't be every character in your story, and so you decide to look at the people in your lives and use your knowledge of them in order to create a new character. Just like putting some of yourself in your main character, there is nothing wrong with that. So what am I on about?
The problem occurs when the writer tells their friend that they are basing a character on them. This is done because we all want to make our friends feel good, and what more can a writer do for a person immortalize them on paper? Unfortunately, we hobble ourselves by doing this. If a writer tells someone that they are basing a character on them, they have just guaranteed that this same character will do all good things. If the person you are basing the character on knows who that character is, they certainly do not want to read about that character doing anything bad or being snarky or any of a million other things that might help move the story along but are considered negative. Those things could even be a true reflection of that friend, but that doesn't mean that they want to read it! So, in order to keep turmoil out of their real lives, writers will alter the actions in their written lives. That means that you just compromised your writing. I don't mean to make that sound like some kind of artistic and somewhat vague comment. It means that you just prevented your story from happening the way that you wanted it to for the sake of another. One compromise makes for a slippery slope to others. To top it off, your character is less believable than before because it is so perfect. Whoops.
So, if you do feel that you need to base your characters off of people you know, which is just fine, shut your mouth about it. If the people who you are basing characters off of don't know what you are doing, you can have those characters react and respond in a much more honest and realistic way. Sure, you might have to be a little more honest with yourself about some of your friends' negative tendencies, but that is ok. They aren't perfect, and that is why you like them. Your characters won't be perfect either, and that is why your readers will like them.