Characters need to feel like real people. They need to be believable and relatable.
But feeling like a real person, and actually being based upon somebody real, are not the same thing.
Even if we don’t consciously set out to base our characters on actual people, it tends to happen that they contain elements of ourselves, and of others we know. Ideas must arise from somewhere, after all.
Sometimes, the sources are more obvious to us than they might be on other occasions. I personally feel that there are elements of myself in each of my characters. But, of course, elements of other people do find themselves into some of the characters, also.
When it comes to including other people, who really exist, in your fiction, you obviously have to be careful about libel, and ethical issues. But these aren’t the only potential hazards.
In truth, real people don’t tend to make great characters, for a few reasons.
We don’t, and can’t, thoroughly know people in real life, however close, and therefore, can’t entirely understand their motives. For this reason alone, we can’t effectively use real people in fiction, and would probably end up resorting to invention, to some degree.
The ideal solution is generally to mix it up.
Some of our own traits can blend with others from people we know, and then we can add a few more elements, from pure imagination. You know how things blur together in dreams? Reality and fiction intertwine, and the result can potentially be fascinating.
I wouldn’t, in conclusion, recommend basing any character, in all aspects, on one specific real person, in a work of fiction.
And I certainly don’t suggest doing what I used to, in some of my childhood stories: making a character name start with the same initial letter as the person the character is modelled upon – or using another name you strongly associate with the person, such as a middle name. Not good. For tips on choosing character names, take a look at my post on that subject.
Sometimes, incidentally, strangers can prove more inspirational than people we actually know. I suggest reading my post about the benefits of people watching for writers, in which I talk about exactly this.