Back when I first started running 3E with my group, I made a serious mistake. The issue of two characters sharing a single 5-foot square came up, and I decided to allow it. It was abused more times that I can think about, including three characters sharing a square during combat.
Now that I'm running a brand-new campaign, I want to do things differently. But if I disallow 5' square sharing totally, the players will revolt.
Right now, I've house ruled that that for every additional person in a square, there's a cumulative -5 penalty to everything: skill checks, attack rolls, saving throws, AC, etc as well as 25% chance of spell failure.
The players think my modifiers are extreme and unfair. I'm willing to bend a little bit, but having minor penalties seems to invite abuse.