When CBS began marketing the building in 1976, various interests in the art and fashion world expressed interest in seeing it converted into a nightclub. Male model Uva Harden tried to get gallery owner Frank Lloyd to finance the club, until Lloyd lost a $9 million lawsuit to the estate of the artist Mark Rothko, the Rothko Case.
In 1977 the theater was transformed into a nightclub called Studio 54 by Steve Rubell and Ian Schrager, with Jack Dushey as a financial backer. They operated the company as Broadway Catering Corp. It took only six weeks to transform the theater into a nightclub and cost $400,000 before its grand opening on April 26.
Rubell and Schrager hired Scott Bromley as architect, Ron Doud as interior designer and Brian Thompson as lighting designer. Jules Fisher and Paul Marantz, two well-known lighting designers, created the dance floor environment and created moveable, theatrical sets and lights using the copious existing TV lighting circuits and fly system, which allowed for a dynamic constantly changing environment. Where formerly all clubs had been very dark, at Studio 54 the crowd could be lit brightly.
Within a month of opening, the New York State Liquor Authority raided Studio 54 for selling liquor without a license, and closed it. The owners of the nightclub said the incident was a "misunderstanding". The next night the club reopened, serving fruit juice and soda instead of liquor. Prior to the raid, the nightclub had been using daily "caterers' permits", which enabled the nightclub to serve alcohol but were intended for weddings or political events. The State had denied the daily permit for the night and raided the nightclub. The nightclub had been using these permits while waiting for its liquor license to be processed.
Event planner Robert Isabell had four tons of glitter dumped in a four-inch layer on the floor of Studio 54 for a New Year's Eve party, which owner Ian Schrager described as like "standing on stardust" and left glitter that could be found months later in their clothing and homes. Frequent regulars at Studio 54 included Andy Warhol, Liza Minnelli, Bianca Jagger, Elizabeth Taylor, Halston, Mick Jagger, Jerry Hall, Debbie Harry, Grace Jones, Michael Jackson, Calvin Klein, Elton John, Tina Turner, Divine, Margaret Trudeau, Sylvia Miles, Francesco Scavullo, Truman Capote, Margaux Hemingway, Janice Dickinson, Mikhail Baryshnikov, Diana Ross, Cher, Salvador Dali, Diana Vreeland, John Travolta, Jackie Kennedy Onassis, Brooke Shields and Martha Graham.
Performers at Studio 54 during its first few years of operation included Grace Jones, Donna Summer, Stevie Wonder, James Brown, Gloria Gaynor, Sylvester, Amii Stewart, Stephanie Mills, The Ritchie Family, The Village People, Anita Ward, Two Tons o' Fun, Jocelyn Brown, France Joli, Cheryl Lynn, Jean Carne, Claudja Barry, Klaus Nomi and Linda Clifford.
In December 1978 Rubell was quoted in the New York newspapers as saying that Studio 54 had made $7 million in its first year and that "only the Mafia made more money". Shortly thereafter the nightclub was raided and Rubell and Schrager were arrested for skimming $2.5 million.
Studio 54 closed with a final party on February 4, 1980, when Diana Ross personally serenaded Rubell and Schrager. Ryan O'Neal, Mariel Hemingway, Jocelyn Wildenstein, Richard Gere, Gia Carangi, Jack Nicholson, Reggie Jackson, and Sylvester Stallone were among the guests that night. Schrager and Rubell pleaded guilty to tax evasion and spent 13 months in prison. It was the first time anyone had ever been prosecuted for a one-year tax evasion.
