[Updated with additional info at end about workarounds for shared purchases with PayPal]
Apple's Family Sharing in iOS 8 is something many users are eager to setup in order to finally deal with the issue of sharing purchased apps (and music and movies and more) with family members. Frustration has set in for some, however, when the setup process informs users that PayPal is not a valid payment option for family purchases.
This is true, at least for setup, and in order to get setup you must change to a credit card. Assuming you have a credit card and can do this, you're in luck. As soon as you've created the Family Sharing group you can go back into iTunes on your Mac and change your billing back to PayPal with (currently) no complaints from the system.
In iTunes on your Mac (or Windows machine) go to iTunes Store > (click on your ID, upper left) > Account. From this screen click "Edit" next to Payment Type and reauthorize your PayPal account.
Change Your Payment Method to Paypal after Setup
That's it! We're not sure if this is an oversight on Apple's part or not and, as such, it's worth bearing in mind that this may not stick around. Clearly there's something about PayPal and Family Sharing that's potentially incompatible on paper.
Update: this works, as above, with one potentially crushing caveat. WIth PayPal listed as the payment method, users are limited to only downloading those apps directly associated with their own iCloud accounts. Attempting to download (or even update) apps from another user will result in an error saying, "Unable to Download - To download shared content, your Familiy must have a valid payment method." Changing from PayPal to a credit card is required to fix this, though at that point you can go back to PayPal if you'd prefer your purchases to come that way.
An easier workaround would be to use PayPal to buy iTunes gift cards for yourself and make your purchases against those. And before you buy at full price from the aforementioned link, try buying at 20% off through this link (only works a few times per year, but is worth it when it does!).