There are two penis related urban legends surrounding The Little Mermaid. Both have been easily disproved, but why let something get in the way of a good story?
The first rumor involves the film's poster artwork, which features the main characters in front of an underwater palace with many pillars and spires. One spire in particular looks almost exactly like a penis, supposedly drawn by an angry Disney worker. Unfortunately, the man who drew it didn't even work directly for Disney and has admitted that the spire's penile resemblance was mere coincidence. Still, the offending spire was later removed.
Within the film itself, however, lay a much juicier urban legend. Supposedly when Ursula and Prince Eric are to be married, the minister marrying them gets an erection plainly seen by all. It turns out that this is a mere trick of the eye. What looks like an erection is just the minister's protruding knees, which is consistent with other shots of the character's lower half.