I've had a house with a small LR where the door opened directly into the room. I used a 60" love seat and floated it facing the fireplace, and then put two chairs on either side of the fireplace. Of course, we didn't have a TV in the room, so you would probably put one chair on either side of the sofa, so one could watch the TV, which I assume is going over the fireplace. In the end, we actually built a wall with an opening into the LR. Everyone told us not to do this as it would make the LR too small. Well, the LR was going to have a pathway to the rest of the house from the front door, so at least we now had a wall where we could put things up against. We were very glad we did this, and subsequent owners of this house have told me they loved having that wall!

I, too, think a sofa, an armchair and an accent/occasional chair would work well in this room. Here's an arrangement to think about along with some furniture options. Since the little ones will play here, I included a storage cabinet for games and toys against the dining room wall. You can top it with art and a lamp - it will make a great feature upon entering the room. A basket for toys or blankets could nestle up beside one of the seats.

Tara, your dilemma kept digging at me. I happen to be shopping for furniture for my living room right now, and it is also a challenge - completely different challenge, but difficult all the same. I have been looking at Stressless furniture and one of the photos that they have on their website doesn't have a sofa - just chairs. It is a very modern look, and today, as decoenthusiast pointed out - people don't really like to sit close together. Then I thought about the home I grew up in. We had a family room with a door, then a sofa then a recliner on one wall and across from the door was a big round table where we ate most of our meals. Next to the table was the TV and then my mom's desk. The 3rd wall was all bookshelves with cabinet lowers. My mom and my aunt usually sat next to each other on the sofa, my dad sat in the recliner and the kids sat at the table or laid on the floor to watch tv. We had 6 kids. It worked. The is what I came up with I used a free app from a furniture store on the internet, so colors weren't options and some of the choices were limited, (Why you have a mirror instead of a TV) but I think you could do something like this - maybe two storage hassocks in the corner so that someone in a club chair could use one to prop their feet up. Pillow and blanket could be stowed in each for the kids to use to lay on the floor.

Your photo did not load. I heard people were having issues. Just wanted to let you know.