Sheltie Issues

A lot of the behaviours you describe are very typical Sheltie traits, it's the breed.  Particularly the barking, nipping at heels (they are a herding breed), and shyness around strangers (also a herding dog trait).

What does alarm me is the growling while you are hugging him and then biting you.  That sounds to me like fear aggression or dominance aggression.  Either he's uncomfortable with you in his space because of fear or insecurity, or because he thinks he's the pack leader and you should not invade his space.  In either case, that's for a professional to handle.  But from what you describe of the personality of the dog, it sounds more like insecurity. 

This breed is very sensitive and absolutely will die if they think you are upset at them.  Even using the slightest form of scorn in your voice could send them running with tail between legs.  This breed absolutely must be taught manners with positive-only reinforcement.  You cannot scold them when they've done wrong, they will curl up in a ball and completely withdraw.  Show them what you do want by rewarding positive behaviour, and ignore the bad behavior.  It's a challenge, but it can be done.  Once my Sheltie knew what was expected of him he was the model citizen. 

I also think some of the other Sheltie behaviours could be curbed a bit with some obedience training (the barking and nipping at heels), but the shyness around strangers may never be overcome.  If you can live with that aspect (that he may never warm up to strangers in your house), Shelties are wonderful dogs and are very smart and he should come around with some professional help and/or obedience training.  I owned a Sheltie from the time he was a puppy until he was almost 15 years old, and he was the best dog I have ever owned.  The nipping at the heels went away with some work and as he got older, but the barking and shyness of strangers never did.  But it was a small price to pay to have such a loyal, charming, sweet, and endearing dog in my life.
 
This was the love of my life....
 
 

I also own shelties and have some suggestions.  Shelties are very biddable dogs and can be usually trained really easily and are very eager to please.  You must train them or they will train you.  One thing about their training is that they are usually soft dogs and don't respond well to harsh training methods.  Correction is ok but it must be gentle corrections.  Usually just a word or noise or looking at them will get their attention and stop the behavior.  The good thing about shelties are that alot of them tend to be food addicts and using treats works really well in training.  Shelties tend to be reserved but not to the point of being shy.  If they are shy it is usually because they didn't get alot of early socialization.  They also are a vocal breed.  It goes back to their herding background.  They will guard their territory and let you know when something is wrong.  The old "Timmy fell down the well bark" is true of this breed.
 
Now for your problems. 
 
If the dog is heel nipping when you run around or walking he is playing.  Stop running and tell him to stop (remember gently).  He has trained you to play his way and you need to show him that that is not the acceptable way of playing. 
 
As far as shy you need to gently socialize him.  He never probably will be a real social dog but you can bring alot of the shyness out of him with positive social interaction.  Having the visitors treat him in a non-threating way helps also.
 
Attending a good obedience class can help alot.  If you go to a training club where definately will be people there that have shelties as they are one of the most popular dogs for obedience and agility.  That environment can also help with the shyness issues and he will learn to trust you. 
 
As far as the barking.  Shelties tend not to like water.  A squirt bottle filled with water can help curb the barking.  You must time the squirt with the barking action and only do one squirt.  Try not to let him know that you are doing it.  Don't use the water to correct any other behavior.  Mine are to the point that if they are barking and I want it to stop all I have to do is pick up the bottle and they stop.
 
When you were holding him it sounds like he was giving you a warning to stop but you didn't.  That is why he lashed out.  He was afraid. 
 
In conclusion it sounds like you have a dog that has fear issues with you and other people.  Good positive gentle training will do wonders with that dog.
 
 

What is wrong with this dog?

He's a Sheltie... Shelties are barky, and have a tendency, if they are not properly trained, to herd things they shouldn't.  If they were herding livestock, it would be quite normal for them to be nipping heels, but we need to teach them not to do it to humans.  It sounds as if he was not well socialized as a puppy - herding breeds are generally not everyone's friend.  The breed standard for most of them specifies "reserved with strangers", but it does not mean that the dog should be either aggressive or exceptionally shy.  Dogs hate to be hugged, and herders are known for not liking to be "mounted" by other dogs, so it would make sense that they don't like to be approached and hugged, especially from above.  However, it is important to desensitize a dog to being handled all over by its owner so that the human can do things like brush the coat, inspect for parasites, or place a collar on the dog.  If your dog is growling at you, stop doing whatever is making him growl.  But find a positive trainer who can show you how to make your dog respect you without you having to be rough or loud.  Shelties are exceptionally bright, and they pick up on training fast.  Clicker training works really well with them.