What kind of paneling do you have? It is solid wood or the the thinner version? If you like the paneling (and against the current trend, I love beautiful wood paneling), then please don't consider painting it. If you don't care for it, go with painting. I painted paneling in my first house and it was very durable; didn't even need to touch it up when I sold. Ultimately, be sure that you do what makes you happy and gives you the feeling that you've "been hugged" when you walk into the room.

Draw the space to scale and cut out pieces of furniture to scale and play until you get what you llike. As for the sofa to allow you to lay side x side I would look at sofas with a pullout seat and it won’t be cheap. Your room is not large for furniture placement so you will need to play with it quite a lot .It does not look like you have a fireplace so that is a blessing check out Besta at Ikea for T.V wall ideas I would utilize the bay for a couple of extra chairs that can be pulled into the main seating area.Then float the rest of the seating.

Lovely set up. My sewing/office/exercise/library and wannabe guest room looks to be much that size and it took me years to get it looking mostly okay. A good bit was really looking hard at what I really used in there. Half the books, a bookcase, half the fabric and the completely unnecessary office supply organizers went as well. Now the desk drawers have room to stash current work, pens and small essentials live in another and the closet will be able to hold sewing projects in progress soon as well. Suspect taking all but the essentials out and reevaluating how to keep things on the shelves will do the trick. I used to have the usual paper office organizing in my spare room office and finally figured out I so rarely needed printing paper and envelopes that they were just fine in a box. Goodbye to the organizer. Perhaps a monitor stand for the printer so you can use space under it would help. If it has a drawer then the small things usually corralled in those desk top organizers could live in there instead.. Perhaps a rolling drawer unit under the desk top would corral some things as well. Not sure what is going on under the corner area but finding a couple good sized baskets that cannot be seen through would look less cluttery. When is the last time you went through paper? Perhaps there are things filed you no longer need. And you know what to do with those magazines!

I’m laughing at the thought of my squishy, comfy pillows being called forbidding or them fighting with anyone. I took a couple of more pictures, including the chairs without the pillows and I think you’ll agree that the cushions make them look more inviting, not less. Also rearranged so that people can see that the sofa facing the fireplace, chair at each side will not work in the space. I tried it as the most obvious answer and discarded it. It’s awkward to me, like the sofa is turning it’s back on everyone. Also, due to the placement of the fireplace, the sofa and chairs cannot be centered on the fireplace or the bedroom will be blocked completely. I can’t pull the sofa back much more without blocking the walkway. The fact is, space for the ‘living room” is much smaller than you think. I also pulled the rug away, to demonstrate that the rug and sofa not going together is kind of the least of this room’s problems. I wish I could get a good angle that shows just how off center the couch and chairs are.