Heparan sulfate acetyl-CoA:α-glucosaminide N-acetyltransferase (HGSNAT) catalyzes the transmembrane acetylation of heparan sulfate in lysosomes required for its further catabolism. Inherited deficiency of HGSNAT in humans results in lysosomal storage of heparan sulfate and causes the severe neurodegenerative disease, mucopolysaccharidosis IIIC (MPS IIIC). Previously we have cloned the HGSNAT gene, identified molecular defects in MPS IIIC patients, and found that all missense mutations prevented normal folding and trafficking of the enzyme. Therefore characterization of HGSNAT biogenesis and intracellular trafficking became of central importance for understanding the molecular mechanism underlying the disease and developing future therapies. In the current study we show that HGSNAT is synthesized as a catalytically inactive 77-kDa precursor that is transported to the lysosomes via an adaptor protein-mediated pathway that involves conserved tyrosine- and dileucine-based lysosomal targeting signals in its C-terminal cytoplasmic domain with a contribution from a dileucine-based signal in the N-terminal cytoplasmic loop. In the lysosome, the precursor is cleaved into a 29-kDa N-terminal α-chain and a 48-kDa C-terminal β-chain, and assembled into active ∼440-kDa oligomers. The subunits are held together by disulfide bonds between at least two cysteine residues (Cys(123) and Cys(434)) in the lysosomal luminal loops of the enzyme. We speculate that proteolytic cleavage allows the nucleophile residue, His(269), in the active site to access the substrate acetyl-CoA in the cytoplasm, for further transfer of the acetyl group to the terminal glucosamine on heparan sulfate. Altogether our results identify intralysosomal oligomerization and proteolytic cleavage as two steps crucial for functional activation of HGSNAT.