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At the risk of sounding totally mercenary, I think some of your decision on whether or not to take on your Sister in law's child should be based on whether or not she is paying the same rates as your other clients. Can you afford to offer her a "family discount" ? Don't feel badly if you can't - the profit margins in this industry are not huge. =) The other thing to consider, is if her child is in your care, that's one less monkey that you can provide care for - again, something to think about before you offer her free or reduced rate childcare.
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I have been caring for my two nephews for over two years now and I love it. It is so amazing to spend so much time with them and be such a big part of their lives. However, it was made clear from the beginning to the parents and the kids (as much as they could understand) that daycare was daycare and being with their aunt was different.
We had a few bumps along the road but i forced myself to address it immediately in the daycare time and it was well received.
The thing I find the most difficult is allowing myself to be the aunt after daycare hours and not get involved with the discipline, the feeding etc.... as it is my roll during the day and I simply want to the be fun loving aunt afterwards.
My advice is simply to be straightforward about your concerns and talk it through with your sister in law. If all goes well and you move forward, make sure to treat them as you would all your clients.
Good luck
