Mental Floss has an article here about ten famous literary characters who were or who may have been based on real people. Creating fictional clones of real people is a time-honored writing tradition; it's one of the subversive ways writers make characters more realistic.
When I want to use living people as character inspiration I usually make conglomeration personality constructs, or build my character based on two or three different souls I know. Cherijo and Duncan from the StarDoc books are two examples of this; both are based on several real people I've worked with or folks I've admired from afar.
My favorite repository for character ideas is antiquity and folklore; I love loosely basing characters on historic figures and then embellishing them with how I imagine they'd be. Robin of Locksley is one character I adapted from legends; I've always wanted to write my version of Robin Hood, and finally got the chance with the Darkyn series. You can conglomerate such inspirations as well. Lucan from Dark Need is based on two of my favorite historic figures (heavily shaken and stirred, I might add.) I've also borrowed from history's mysteries for character inspiration. Matthias from my novel Shadowlight was based on a very cool mystery man; he and some of the details of his backstory were directly inspired by Ötzi the Iceman.
Some things to consider when you base characters on real people:
Is the person providing your character inspiration likely to read the story? If so, consider their reaction. Your Great Aunt Mildred may be the perfect model for your antagonist, but after she reads herself in your story will she ever speak to you again?
If the real life person might be offended, consider using a harmless reference versus making them a character in the story. I used to name inanimate objects like starships and cocktails after other writers; I've also paid homage to my writer friends by having my characters mention their books.
When you are going to write a real-life person into your story, be true to them. My dad was a tremendous influence on me throughout my life, and before he passed away I took the chance to write him into my novel Dreamveil as himself, changing only his name. I was also careful to show him as he really was (in the kitchen, all business) so every time you read a scene in that book in which Lonzo appears, that's really my dad on the page.
Hide your character inspirations like Easter eggs in the story. This requires a little deviousness on your part, but it can be done, especially if you use the real life person as a very minor character, mention them in passing in dialogue, or otherwise hide them in plain sight. To date only one sharp-eyed reader found one of my Easter egg characters, but he was right on the money, probably because we both deeply admired the same person.
From my POV it's an honor to be used as a character inspiration (and I have been Tuckerized more than once by other writers.) It's also a little disconcerting to find yourself in a story without any warning, so you might consider letting your inspiration know in advance. Just so they don't freak out. Also, if you want to borrow a real life person's unusual first name or surname for one of your characters, it's probably best (and courteous) to first ask permission.
Have you ever based one of your characters on a real-life person? How did you handle it? Let us know in comments.
(Link for the Mental Floss article found over at The Presurfer.)