Do you know why dating your employees is frowned upon? The chance of sexual harrassment lawsuits is one. But, you create a conflict of interest by having a personal relationship with someone you work with. What about hiring your nephew? This practice was done a lot in the old days, but is less common these days as it is seen as unethical to give someone a leg up simply because they are family.
You will be biased towards an employee with whom you have a personal relationship, and this generally counts against you. On the one hand, maybe the employee will do better work because they know you. On the other hand, you will be less likely to fire them or punish them if you are emotionally invested in them. My personal opinion is that you need to get to know your employees personally to a point, but there also needs to be a line that you don’t cross.
Conversely in business relationships where you are both on the same level — for example you are both entrepreneurs of small companies — in such a case it is good to develop a personal relationship. In an outsourcing relationship, you will be treated much better if you have a personal relationship with the other party. Outsourcing companies are generally impersonal and often do horrible work. Knowing them can get you a lot of extra help, loyalty, and more.
The type of relationship you should have with your employees is one where you are ready to fire them if they start screwing up. This means that not only should you be emotionally detached from them, but you also need a long list of backups that can do their job. If you don’t have backups, you need to be very experienced in the art of hiring replacements, otherwise you don’t have the upper hand. And as a business owner, you must always have the upper hand! You might go twenty years without firing anyone, but you should always be ready like a Samurai ready to strike!