Living Room and Entertainment CenterYour Sims desire entertainment and fun! Whether you're planning ahead for guests, or just want your household Sims to have a place to relax, it's important to ensure that you give everyone a bit of space to satisfy their Fun and Social desires, preferably at the same time.
Your first choice regarding the living room revolves around whether or not you want to place it in the same room as the kitchen/dining area. If you put all of these into one open space, you'll be able to combine their Environment scores, which can be either a good or bad thing, depending on your ability to keep everything clean and neat. The kitchen is more often the source of poor Environment scores, due to messy dishes and such, but if you can keep it clean via a maid or let one of your Neat Sims go to town after everyone gets done eating, this shouldn't be too much of a problem.
As mentioned, though, you'll want to have some kind of item that lets your guests or roommates entertain themselves while socializing with each other. The obvious choice here would be one of the television sets, but these actually serve to drain your Sim's Energy while they watch, which is a Bad Thing. If you don't have any other options, let your Sims plunk down on the couch and watch SBN, which teens, adults, and elders will all find satisfying. (Toddlers and Children won't be as enthralled by all the Sim news, so you may want to find something else for them to watch if they're solo.)
A far better item to spend your money on is the Maxis Game Simulator, which actually gives an equivalent amount of Fun to your Sims regardless of whether they're playing or just watching. If two people are playing, or if a Sim is watching, they'll also gain Social while they continue to do so. Don't forget to buy a nice couch as well, as that will let you gain back some Comfort while you sit.
Another good choice for a living room is a decent stereo. While these can't get your Fun motive as high as the Game Simulator can, some Wants revolve around dancing with other Sims, especially for Sims with the Romance Aspiration. This is only possible if you've got the groove, so put a decent stereo somewhere near the main socialization area; many Sims will dance autonomously at parties. There's not much of a functional difference between the Fun-Kadelic Stereo and the Soma Audiogeek, so feel free to go with the less expensive option.
One last object of note is the good old hot tub. These are great for socializing purposes; as many as four different Sims can get into a hottub at the same time, and each will satisfy Comfort, Fun, and give you a sizable Environment boost as well. If multiple Sims get in together and start talking to each other, you'll also get a bit of Social. The main drawback to the hot tubs is that they're very large; if you want to plop one down, you'll have to clear out a 3x3 space, and ensure that you give a bit of buffer room around it to let Sims change and submerge. The VaporWare Spa is better for central placement, as Sims can enter on any side; the Bubble-Up is more suitable for corner placement, as it can only be entered on two sides.
Of course, these are only a few of the many, many different objects that can satisfy Fun, so don't hesitate to search through the Build mode and see what piques your interest.