My studio is in a small bedroom on the main floor. The key, as others have said, is storage, storage, storage. I'm blessed with two double closets and a single.
My husband hung pegboard on the walls for my quilting supplies. I have a large piece of batting on a curtain rod above the pegboard that I can roll down and use as a design wall.
He also took the top of a cheap cutting table and mounted it on an antique wrought iron rolling island. It's heavy enough that it won't roll when I'm cutting or ironing, but it's great to be able to move it out of the way when I need to.
An antique singer treadle table with a slate top holds my machines.
I also do graphic design, so I have an area for my computers and desk stuff.
:) Donna