The parallel city of Monstropolis is inhabited by monsters and powered by the screams of children in the human world. At the factory of Monsters, Inc., employees called “scarers” venture into children’s bedrooms to scare them and collect their screams, using closet doors as portals. This is considered a dangerous task because the monsters believe children are toxic and that touching them would be fatal. However, production is falling as children are becoming harder to scare and the company’s chairman Henry J. Waternoose III is determined to find a solution. The top scarer is James P. “Sulley” Sullivan, who lives with his friend and assistant Mike Wazowski and has a rivalry with the ever-determined chameleon-like monster Randall Boggs. During an ordinary day’s work on what is known as the “Scarefloor”, another scarer accidentally brings a child’s sock into the factory, causing the Child Detection Agency (CDA) to arrive and cleanse him. Mike is frequently ridiculed by the company’s clerk Roz for never completing his paperwork on time.
While working late at the factory, Sulley discovers that Randall left an activated door on the scarefloor and a young girl has entered the factory, much to Sulley’s horror. After a few failed attempts to put her back, he places her in his bag and hides when Randall arrives and returns the door to storage. Mike is at a restaurant on a date with his girlfriend Celia when Sulley comes over to him for help, but chaos erupts when the girl is discovered in the restaurant, and the CDA is called. Sulley and Mike escape the CDA and take the girl home, discovering that she isn’t toxic after all. Sulley quickly grows attached to the girl and names her “Boo”. The next day, they smuggle her into the factory and Mike attempts to return her through her door. Randall discovers that Boo is in the factory after seeing Mike in the newspaper with her. He tries to kidnap Boo, but instead kidnaps Mike by mistake.
In the basement, Randall reveals to Mike that he has built a torture machine called the Scream Extractor, which would make the company’s current tactics redundant. Randall straps Mike to the chair for experimentation, but Sulley stops Randall by unplugging the machine and reports Randall to Waternoose. However, Waternoose is revealed to be in allegiance with Randall and exiles Mike and Sulley to the Himalayas. The two are taken in by Yeti, who tells them they can return to the factory through a nearby village. Sulley heads out, but Mike refuses to follow him out of frustration. Sulley returns to the factory and rescues Boo from the Scream Extractor. Mike returns to apologize to Sulley and inadvertently helps Sulley defeat Randall in a fight.
Randall pursues Mike and Sulley as they race through the factory and ride on the doors heading into storage, taking them into a giant vault where millions of closet doors are stored. Boo’s laughter activates the doors and allows the chase to pass in and out of the human world. When Randall attempts to kill Sulley, Boo is able to defeat Randall before Sulley and Mike trap him in the human world using a door to a trailer located in a bayou, where the residents mistake Randall for an alligator and beat him senseless with a shovel.
They are finally able to access Boo’s door, but Waternoose and the CDA send it back to the Scarefloor. Mike distracts the CDA, while Sulley escapes with Boo and her door while Waternoose follows. While arguing with Sulley, Waternoose reveals that he is working with Randall to kidnap kids and build the Scream Extractor in order to keep the company from going out of business and put an end to the energy crisis. The CDA appears after hearing Waternoose’s confession and arrest him. The CDA’s leader is revealed to be Roz, who has been undercover for two-and-a-half years trying to expose Waternoose’s plot and thanks them for the help. Sulley and Mike say goodbye to Boo and return her home; on Roz’s orders Boo’s door is shredded. Sulley becomes the new chairman of Monsters Inc., and thanks to his experience with Boo, he comes up with a plan to end the company’s energy crisis.
Months later, Sulley’s leadership has changed the company’s workload. The monsters now enter children’s bedrooms to make them laugh, since laughter is ten times more powerful than screams. Mike takes Sulley aside, revealing he has almost rebuilt Boo’s door, requiring only one more piece which Sulley took as a memento. Sulley enters and reunites with Boo.