(FORTUNE Small Business) – In a perfect world, romance would never show its spaniel-eyed face at your company. Who needs the emotional dramas, the public displays of affection, or the breakup angst that can spread through an office faster than the flu? Love in the office "is always disruptive," says Marc Ostrofsky, 41, a serial entrepreneur and investor based in Houston. "The only upside is during that period when things are peachy keen between a couple and both are willing to come to work early and stay late."

Ostrofsky's view is one widely held among employers large and small, yet office romance is becoming more and more accepted. Corporate paranoia about harassment lawsuits has given way to a tolerant, keep-it-professional attitude. Policing workers seems futile in an increasingly laissez-faire society--and faintly ridiculous when often it's the boss who's making kissy faces at work. Bill Clinton and Bill Gates didn't refrain from interoffice fraternization. Would you accept a no-relationship rule from either of them?

Those who study the subject say office romance is on the rise and--apart from boss-employee relations and extramarital affairs--is becoming more respectable. Two-thirds of managers and executives surveyed last year by the American Management Association said it's okay to date someone from work. Of the 30% who have dated colleagues, half added that those dates led to marriage or a long-term relationship. Workplace relationships rose to about ten million last year, up from eight million in 1998, estimates Dennis Powers, a business-law professor at Southern Oregon University and author of The Office Romance: Playing With Fire Without Getting Burned. (Powers established the 1998 figure in a survey he conducted with U.S. News & World Report and calculated the 2003 number using statistics from the U.S. Department of Labor and the Bureau of National Affairs.)

Employers are justified in relaxing their fraternization policies, says Powers, because, at least in the aggregate, failed love affairs rarely come back to haunt companies. Over a five-year period ended in 1998, just 4% of the people who had an office romance in 617 companies surveyed by the Society for Human Resource Management saw it end badly and made a formal complaint. Even so, most firms wisely ban fraternization between people in the same chain of command to avoid sexual harassment suits, says attorney Daniel Blake, a labor partner in Epstein Becker & Green's Boston office. Experts advise against general bans on office romance, which might invite invasion-of-privacy lawsuits. So far, though, workers have filed only a handful of such suits, and none have held up in court. (Firms can't specifically ban extramarital liaisons among employees because most states prohibit discrimination based on marital status, says Eric Matusewitch, deputy director of the New York City Equal Employment Practices Commission.)

Love affairs don't have to generate lawsuits to be disruptive, of course, and the smaller the business, the greater the impact. In a one-office company with a handful of employees it's more likely that everyone has overlapping duties and less likely that you can transfer a love-struck worker to a different department or boss, which is one of the most effective ways to deflect a sexual harassment suit. Some employers ask co-workers in a dating relationship to sign a "love contract," or consensual-relationship agreement, in which both parties acknowledge that they are willing participants. Generally, says Blake, the agreements are used as a defense in sexual harassment suits more than anything else. Blake, whose office specializes in entrepreneurial clients, instead recommends that bosses monitor the situation to ascertain that no one's work performance is suffering and that there are no negative repercussions in the workplace.

But what, exactly, is a tolerable level of disruption? To retain valued employees, company owners sometimes live with intrigue and grievances unless a serious problem develops. "My personal pet peeve is all the rumor and innuendo that goes on around a relationship at work," says David Rippe, 45, CEO of Celestia International, a five-employee marketing and communications firm in Cincinnati. At Dia Interactives, a marketing company with 44 employees that he dissolved in 2001, he witnessed several romances among staffers, ranging from a one-night liaison involving a married man, to an on-again, off-again long-term relationship between two single people. "There would be days when a couple weren't talking to each other, and you could feel the negative energy. You get pulled in," he recalls. Apart from asking the romantic partners to look beyond their emotions in performing their work, Rippe did not intervene in the relationship involving the single people, even when the rumor mill was in overdrive. He reasoned that if a serious problem developed, they would mention it to him. But when he got complaints that the married man "started hitting on every woman in the office," he says, he told him to stop, and the problem ended. Rippe has taken a similar approach at Celestia.

Indeed, love flourishes at many small companies without causing problems. Scott Leeds, 34, co-founder and chief operating officer of Quorum Business Solutions, a software consulting firm with offices in Houston, Dallas, and Calgary, Alberta, says more than half of his 150 employees are recent college graduates. Many date colleagues. Quorum doesn't allow corporate officers to date employees, or supervisors to date those who report directly to them. Otherwise, office romance is fine. "In all the relationships that occur, I've noticed that employees go out of their way to keep personal lives independent of work," says Leeds.

But keeping a lid on love is sometimes tough. The founder and CEO of a computer-refurbishing company near Sacramento with $2.4 million in annual sales has been struggling with a female warehouse manager who has twice had affairs with computer technicians who reported to her. A few months ago the CEO (who asked that he and his firm not be named) spoke to the manager about how her latest relationship could make his company vulnerable to a lawsuit from her boyfriend. "She got a little defensive and said she didn't think there would be any difficulty," says the CEO.

But he thinks the relationship has compromised her judgment. Recently the technician began grousing after the CEO denied him the opportunity to install a new computer network. The CEO had several discussions with him, explaining that he lacked the necessary skills and then asked the warehouse manager to handle the problem. Instead, she defended her boyfriend. "It became clear that she had no real ability to be objective," says the CEO.

Another dilemma: The warehouse manager protects her boyfriend whenever he makes a mistake. The blame is turned back onto other technical-support employees, causing resentment and frustration. Because the warehouse manager is otherwise a good employee and the couple recently announced their engagement, the CEO is living with the problems until the technician leaves the company in order to join the Army, a plan he recently announced.

Does it all sound like a nightmarish rerun of your high school's dating scene? Well, consider that the headaches of managing lovers seem minor compared with what an entrepreneur can encounter when he or she falls for an employee. Paul Lewis, 38, CEO of P.G. Lewis & Associates, a data forensics firm in Whitehouse Station, N.J., with $2 million a year in sales, readily admits that his office romance of a decade ago "was the biggest mistake I made in my professional career." Then the CEO of MC2 [MC squared], a computer systems integration company in Warren, N.J., with $1.5 million in annual sales, Lewis began dating his office manager a few months after hiring her in 1993. Later she moved into his house, and they stayed together about two years.

"That decision almost sank my company. I lost respect from my employees, arguments were brought into the office from my home, and my business partner thought I was an idiot," Lewis says. He encouraged his live-in girlfriend to pursue a different career, which she did, and the relationship broke up. He sold MC2 [MC squared] in 1999. At his current 15-employee company, "we have a strict rule that you're not allowed to be involved with anyone at the company," he says. He's even requiring that the wife of the founder of a small company that P.G. Lewis is acquiring be terminated from her office manager job as a condition of the deal.

For Christine Carey, 33, and Jerry Golley, 38, trying to conduct both a romantic and a work relationship for five years was so stressful that their bond crumbled in both arenas. They met and began dating in the Denver office of Lipper Analytical Services, a financial firm based in New York City, in 1995. After Golley launched AMI Visions, a software firm in Lakewood, Colo., in 1996, his third hire was Carey. "We had total trust," says Golley.

For the first three or four years the couple, who were living together, maintained both a professional and a personal relationship with the help of some strict rules. Neither, for instance, was allowed to mention business once one of them changed into pajamas. Both worked hard to maintain their professionalism at the office. "It worked, but we were suppressing a great deal and creating a pressure-cooker situation," says Carey.

The strain began to show in 2000, when Carey disagreed with many of the decisions made by a new president whom Golley had promoted from within the company. Golley deferred to the executive's judgment, which he says "drove a wedge between me and Christine." Another source of tension was Golley's decision to give one share of common stock to the new president, rather than Carey, in order to obtain key-man insurance. "He was running the company day to day, and if something like an accident were to happen to me, there was a good probability Christine would have been with me and we both would have been dead," says Golley. Carey thought it signified a shortcoming in their relationship: "I sort of understood. But deep down it hurt."

By 2001 a sputtering economy added a new layer of stress. The company needed to lay off one of seven highly paid managers. Christine volunteered to step away, hoping that it would help her and Golley rekindle their feelings. Although they had gotten engaged, "we'd pretended we didn't have any passion for so long, after a while I didn't feel it," says Carey. Nor did Golley.

After Carey left, they had less time together--and less and less in common--as Jerry devoted long hours to AMI. In the summer of 2002, Carey moved out and they stopped seeing each other. Both say they feel they sacrificed a unique romantic bond so that AMI could survive and grow. "Sexual passion and work life should absolutely be separated," says Carey. "I would never again date somebody I work with." Though his business is again stable and thriving, with about $2 million in revenues last year, Golley agrees: "Even if it works well, you're creating issues and complexities in your relationship." And like many entrepreneurs who've discovered the hazards of office romance, he'd prefer, when he's behind his desk, to concentrate on the complexities of business.