After having moved back to Chicago, Anderson formally divorced Cornelia. Later, he married his mistress, the Sculptor Tennessee Claflin Mitchell (1874–1929). Anderson divorced Mitchell in 1924 in Reno, Nevada, and soon the same year married his third wife, Elizabeth Prall, a woman he was already involved with before the divorce.

Sherwood Berton Anderson was born on September 13, 1876 in Camden, Ohio, a farming town with a population of around 650 (according to the 1870 census). He was the third of seven children born to Emma Jane (née Smith) and former Union soldier and harness-maker Irwin McLain Anderson. Considered reasonably well-off financially—Anderson's father was seen as an up-and-comer by his Camden contemporaries, the family left town just before Sherwood's first birthday. Reasons for the departure are uncertain; most biographers note rumors of debts incurred by either Irwin or his brother Benjamin. The Andersons headed north to Caledonia by way of a brief stay in a village of a few hundred called Independence (now Butler). Four or five years were spent in Caledonia, years which formed Anderson's earliest memories. This period later inspired his semi-autobiographical novel Tar: A Midwest Childhood (1926). In Caledonia Anderson's father began drinking excessively, which led to financial difficulties, eventually causing the family to leave the town.

That year Anderson married Elizabeth Norma Prall (1884–1976), a friend of Faulkner's whom he had met in New York. After several years that marriage also failed. In 1928 Anderson became involved with Eleanor Gladys Copenhaver (1896–1985).

By Anderson's 18th year in 1895, his family was on shaky ground. His father had started to disappear for weeks. Two years earlier, in 1893, Karl, Sherwood's elder brother, had left Clyde for Chicago. On May 10, 1895, his mother succumbed to tuberculosis. Sherwood, now essentially on his own, boarded at the Harvey & Yetter's livery stable where he worked as a groom—an experience that would translate into several of his best-known stories. (Irwin Anderson died in 1919 after having been estranged from his son for two decades.) Two months before his mother's death, in March 1895, Anderson had signed up with the Ohio National Guard for a five-year hitch while he was going steady with Bertha Baynes, an attractive girl and possibly the inspiration for Helen White in Winesburg, Ohio, and he was working a secure job at the bicycle factory. But his mother's death precipitated the young man's leaving Clyde. He settled in Chicago around late 1896 or spring/summer 1897, having worked a few small-town factory jobs along the way.

Anderson moved to a boardinghouse in Chicago owned by a former mayor of Clyde. His brother Karl lived in the city and was studying at the Art Institute. Anderson moved in with him and quickly found a job at a cold-storage plant. In late 1897, Karl moved away, and Anderson relocated to a two-room flat with his sister and two younger brothers newly come from Clyde. Money was tight—Anderson earned "two dollars for a day of ten hours"— but with occasional support from Karl, they got by. Following the Example of his Clyde confederate and lifelong friend Cliff Paden (later to become known as John Emerson) and Karl, Anderson took up the idea of furthering his education by enrolling in night school at the Lewis Institute. He attended several classes regularly including "New Business Arithmetic" earning marks that placed him second in the class. It was also there that Anderson heard lectures on Robert Browning, Alfred Tennyson, and was possibly first introduced to the poetry of Walt Whitman. Soon, however, Anderson's first stint in Chicago would come to an end as the United States prepared to enter the Spanish–American War.

Although he had limited resources while in Chicago, Anderson bought a new suit and returned to Clyde to join the military. Once home, the company he joined mustered into the army at Camp Bushnell, Ohio on May 12, 1898. Several months of training followed at various southern encampments until early in 1899, when his company was sent to Cuba. Fighting had ceased four months prior to their arrival. On April 21, 1899, they left Cuba having seen no combat. According to to Irving Howe, "Sherwood was popular among his army comrades, who remembered him as a fellow given to prolonged reading, mostly in dime westerns and historical romances, and talented at finding a girl when he wanted one. For the first of these traits he was frequently teased, but the second brought him the respect it usually does in armies."

After the war, Anderson resided briefly in Clyde performing agricultural work before deciding to return to school. In September 1899 Anderson joined his siblings Karl and Stella in Springfield, Ohio where, at the age of twenty-three he enrolled for his senior year of preparatory school at the Wittenberg Academy, a preparatory school located on the campus of the Wittenberg University. In his time there he performed well, earning good marks and participating in several extracurricular activities. In the spring of 1900 Anderson graduated from the Academy, offering a discourse on Zionism as one of the eight students chosen to give a commencement speech.

Though he performed well, problems with his boss and a dislike for the office routine and for the style of correspondence, which caused the ultimate rift, caused Anderson to leave Crowell in mid-1901 for a position set up for him by Marco Marrow, another friend from The Oaks, at the Frank B. White Advertising Company (later the Long-Critchfield Agency). There the author stayed until 1906, selling ads and writing advertising copy for manufacturers of farming implements and articles for the trade journal, Agricultural Advertising. In this latter magazine Anderson published his first professional work, a February 1902 piece called "The Farmer Wears Clothes." What followed were approximately 29 articles and essays for his company's magazine, and two for a small literary magazine published by the Bobbs-Merrill Company called The Reader. According to scholar Welford Dunaway Taylor, the two monthly columns ("Rot and Reason" and "Business Types") Anderson wrote for Agricultural Advertising exemplified the "character writing" (or character sketches) that would later become a notable part of the author's approach in Winesburg, Ohio and other works.

Part of Anderson's job in those early years of his career was making trips to solicit potential clients. On one of these trips around May 1903 he stopped in the home of a friend from Clyde, Jane "Jennie" Bemis, then living in Toledo, Ohio. It was there that he met Cornelia Pratt Lane (1877–1967), the daughter of wealthy Ohio businessman Robert Lane. The two were married a year later, on the 16th of May, in Lucas, Ohio. They would go on to have three children—Robert Lane (1907–1951), John Sherwood (1908–1995), and Marion (aka Mimi, 1911–1996). After a short honeymoon, the couple moved into an apartment on the south side of Chicago. For two more years, Anderson worked for Long-Critchfield until an opportunity came along from one of the accounts he managed and so on Labor Day 1906, Sherwood Anderson left Chicago for Cleveland to become President of United Factories Company, a mail-order firm selling various items from surrounding firms.

His failure in Cleveland did not delay him for long, however, because in September 1907, the Andersons moved to Elyria, Ohio, a town of approximately ten thousand residents, where he rented a warehouse within sight of the railroad and began a mail-order Business selling (at a markup of 500%) a preservative paint called "Roof-Fix." The first years in Elyria went very well for Anderson and his family; two more children were added for a total of three in addition to a busy social life for their parents. So well, in fact, did the Anderson Manufacturing Co. do that Anderson was able to purchase and absorb several similar businesses and expand his firm's product-lines under the name Anderson Paint Company. Carrying on that momentum, in late 1911 Anderson secured the financial backing to merge his companies into the American Merchants Company, a profit-sharing/investment firm operating in part on a scheme he developed around that time called "Commercial Democracy."

On Thursday, November 28, 1912, Anderson came to his office in a slightly nervous state. According to his secretary, he opened some mail, and in the course of dictating a Business letter became distracted. After writing a note to his wife, he murmured something along the lines of "I feel as though my feet were wet, and they keep getting wetter." and left the office. Four days later, on Sunday December 1, a disoriented Anderson entered a drug store on East 152nd Street in Cleveland and asked the pharmacist to help figure out his identity. Unable to make out what the incoherent Anderson was saying, the pharmacist discovered a phone book on his person and called the number of Edwin Baxter, a member of the Elyria Chamber of Commerce. Baxter came, recognized Anderson, and promptly had him checked into the Huron Road Hospital in downtown Cleveland, where Anderson's wife, who he would hardly recognize, went to meet him.

Anderson's first novel, Windy McPherson's Son, was published in 1916 as part of a three-book deal with John Lane. This book, along with his second novel, Marching Men (1917) are usually considered his "apprentice novels" because they came before Anderson found fame with Winesburg, Ohio (1919) and are generally considered inferior in quality to works that followed.

Anderson's most notable work is his collection of interrelated short stories, Winesburg, Ohio (1919). In his memoir, he wrote that "Hands", the opening story, was the first "real" story he ever wrote.

Although his short stories were very successful, Anderson wanted to write novels, which he felt allowed a larger scale. In 1920, he published Poor White, which was rather successful. In 1923, Anderson published Many Marriages; in it he explored the new sexual freedom, a theme which he continued in Dark Laughter and later writing. Dark Laughter had its detractors, but the reviews were, on the whole, positive. F. Scott Fitzgerald considered Many Marriages to be Anderson's finest novel.

Anderson obtained a divorce from Tennessee Claflin Mitchell in Reno, Nevada in 1924.

Anderson referred to meeting Faulkner in his ambiguous and moving short story, "A Meeting South." His novel Dark Laughter (1925) drew from his New Orleans experiences and continued to explore the new sexual freedom of the 1920s. Although the book is now out of print (and was satirized by Ernest Hemingway in his novella The Torrents of Spring), it was a bestseller at the time, the only book of Anderson's to reach that status during his lifetime.

In his later years, Anderson and Copenhaver lived on his Ripshin Farm in Troutdale, Virginia, which he purchased in 1927 for use during summers. While living there, he contributed to a country newspaper, columns that were later collected and published posthumously.

Beyond Desire built on his interest in the trade union movement and was set during the 1929 Loray Mill Strike in Gastonia, North Carolina. Hemingway referred to it satirically in his novel, To Have and Have Not (1937), where he included as a minor character an author working on a novel of Gastonia.

In the 1930s, Anderson published Death in the Woods (short stories), Puzzled America (essays), and Kit Brandon: A Portrait (novel). In 1932, Anderson dedicated his novel Beyond Desire to Copenhaver. Although by this time he was considered to be less influential overall in American literature, some of what have become his most quoted passages were published in these later works. The books were otherwise considered below the level of quality of his earlier ones.

In 1933, Anderson and Copenhaver married. They traveled and often studied together. They were both active in the trade union movement. Anderson also became close to Copenhaver's mother, Laura.

Anderson frequently contributed articles to newspapers. In 1935, he was commissioned to go to Franklin County, Virginia to cover a major federal trial of bootleggers and Gangsters, in what was called "The Great Moonshine Conspiracy". More than 30 men had been indicted for trial. In his article, he said Franklin was the "wettest county in the world," a phrase used as a title for a 21st-century novel by Matt Bondurant.

Anderson died on March 8, 1941, at the age of 64, taken ill during a cruise to South America. He had been feeling abdominal discomfort for a few days, which was later diagnosed as peritonitis. Anderson and his wife disembarked from the cruise liner Santa Lucia and went to the hospital in Colón, Panama, where he died on March 8. An autopsy revealed he had accidentally swallowed a toothpick, which had damaged his internal organs and resulted in infection and then peritonitis. He was thought to have swallowed it in the course of eating the olive of a martini or hors d'oeuvres.

But even before returning home, Anderson began his lifelong practice of reinterpreting the story of his breakdown. Despite news reports in the Elyria Evening Telegram and the Cleveland Press following his admittance into the hospital that ascribed the cause of the breakdown to "overwork" and that mentioned Anderson's inability to remember what happened, on December 6 the story changed. All of a sudden, the breakdown became voluntary. The Evening Telegram reported (possibly spuriously) that "As soon as he recovers from the trance into which he placed himself, Sherwood Anderson ... will write a book of the sensations he experienced while he wandered over the country as a nomad." This same sense of personal agency is alluded to thirty years later in Sherwood Anderson's Memoirs (1942) where the author wrote of his thought process before walking out: "I wanted to leave, get away from Business. ... Again I resorted to slickness, to craftiness...The thought occurred to me that if men thought me a little insane they would forgive me if I lit out...." This idea, however, that Anderson made a conscious decision on November 28 to make a clean break from family and Business is unlikely. In the first place, contrary to what Anderson later claimed, his writing was no secret. It was known to his wife, secretary, and some Business associates that for several years Anderson had been working on personal writing projects both at night and occasionally in his office at the factory. Secondly, though some of the notes he wrote to himself during his journey, notes he mailed to his wife on Saturday, addressing the envelope "Cornelia L. Anderson, Pres., American Striving Co.," show that he had some semblance of memory. The general confusion and frequent incoherence the notes exhibit is unlikely to be deliberate. While diagnoses for the four days of Anderson's wanderings have ranged from "amnesia" to "lost identity" to "nervous breakdown," his condition is generally characterized today as a "fugue state." Anderson himself described the episode as "escaping from his materialistic existence," and was admired for his action by many young male Writers who chose to be inspired by him. Herbert Gold wrote, "He fled in order to find himself, then prayed to flee that disease of self, to become 'beautiful and clear.'"

During his time in Springfield, Anderson stayed and worked as a "chore boy" in a boardinghouse called The Oaks among a group of businessmen, educators, and other creatives types many of whom became friendly with the young Anderson. In particular, a high school Teacher named Trillena White and a businessman Harry Simmons played a role in the author's life. The former who was ten years Anderson's senior would walk—raising eyebrows among the other boarders—with the young man in the evenings. More importantly, according to Anderson, she "first introduced me to fine literature" and would later serve as inspiration for a number of his characters including the Teacher Kate Swift in Winesburg, Ohio. The latter, who worked as the advertising manager for Mast, Crowell, and Kirkpatrick (later Crowell-Collier Publishing Company, publishers of the Woman's Home Companion) and occasionally took meals at The Oaks, was so impressed by Anderson's commencement speech that he offered him a job on the spot as an advertising solicitor at his company's Chicago office. Thus, in the summer of 1900, Anderson returned to Chicago where most of his siblings were now living, intent on achieving success in his new white-collar occupation.