The living room is often home to computers, tables and closets - and so cannot fully be used for a home theater system. That is the reason many people hesitate to buy a home theater system, fearing that their small space will not have enough room to accommodate it.
The good news is that compact systems are growing in quality and availability. You have to take your space restrictions into account when buying a home theater system, but provided you do that you can build a very successful system even for smaller spaces.