I am glad you asked this question.
1) How does it start?
Shunning can happen for two reasons: disfellowshipping or disassociation. Disfellowshipping is where you do an unrepentant sin that is so bad, that the elders automatically disfellowship you to keep the flock spiritually clean. For example, smoking or celebrating Christmas would be a disfellowshipping sin...as would adultery or murder.
Disassociation is where you are considered to have ousted yourself because of your actions. This is the new trick to begin shunning on a sect member who unrepentantly would accept a blood transfusion for himself, a family member, or recommend a blood transfusion to another follower. The Society calls is disassociation, so as to make it appear to be the follower's choice. But, it is really the same coin.
2) What does shunning entail?
I was taught that you couldn't even look at the sinner. His evil would ensnare you. You are to consider the person dead in your eyes, as they are dead in Jehovah's eyes. Even if you see him in the mall, you are not to even nod hello. The sinner is so bad that they will never be resuurected into the Paradise Earth after Amegheddon.
In the family situation, it's tricky. If the sinner turns 18, the immediate family (including mom & dad) are to shun the sinful child. This means absolutely no contact whatsoever. Thrown out of the house, written out of the will, etc.
If the sinner is under 18, the parents are now commanded to continue providing for the child's wellbeing, but to discontinue talking about spiritual matters with the child and having prayer apart. The uncles/aunt/cousins/etc. of the sinful child are expected to have no contact with the child.
If the sinner is a spouse, then the other spouse is encouraged to avoid talking of any spiritual matters. The Soceity gives a "nod" if the goodie spouse wants to divorce the sinner spouse.
Say a parent goes against the religion...his children are sort of "marked" in the church as being from a bad family. They are semi-shunned, for their parent's sins. So many times, the child will "go the extra mile" and become a super-Jehovah's Witness in an attempt to regain social status.
Legalistic matters are allowed to be communicated between family members (i.e. your mother died). Only the elders can contact an ousted member, and that is to see if the sinner wants to repent and rejoin.
3) A follower can be disfellowshipped for not following the shunning rules.
4) Why does this matter?
Jehovah's Witnesses are a super tight circle. They are not encouraged to keep non-Jehovah's Witness friends (i.e. "worldly people"). Jehovah's Witnesses are taught that worldly people are sinful and evil, and will be killed in Armegheddon unless they find Jehovah first. While they do speak with worldly people in order to indoctrinate them or to do business with them as their employment requires, I don't think you'd ever find a Jehovah's Witness openly throwing a party at their house and inviting worldly people over.
Their entire circle of friends becomes the Witnesses. Many times their job is linked to another Jehovah's Witness business. To "go against" the religion, they have to replace their family, friends, and sometimes their jobs.
Imagine if everyone in your family died today. That is how shunning feels. If you call them up, they will hang up the phone. Letters will be returned. It's devastating and has lead to suicides.
5) Current literature on shunning. I think this will answer alot of your questions.
http://www.jehovahs-witness.net/watchtower/beliefs/173213/1/How-does-shunning-work