Monsters, Inc. is the power company in the city of Monstropolis. Monsters, Inc. sends its many monster employees, skilled in scare techniques, to human children's bedrooms around the world at their local bedtime to scare them, through individually-loaded and activated teleportation doors set up on the “scare floor”, each of which precisely matches a closet door in the individual child’s bedroom. The screams of the suddenly-awakened tots, captured through the portals, generate electric power for the monster world. It is understood, however, that the children themselves are toxic, and the company goes to great lengths to prevent contact with them; should a monster be touched by a child, or simply their belongings, the Child Detection Agency (CDA) is immediately alerted to sanitize the affected being. With increasing numbers of children becoming desensitized by mass media, Monsters, Inc. CEO Henry J. Waternoose is finding it increasingly difficult to harvest enough scream to meet the power demands of Monstropolis, as their energy crisis looms.
One evening, James P. Sullivan ("Sulley"), Monsters, Inc.'s top scarer, finds a loaded door on the scare floor after hours - in violation of policy. Peering inside, the child's room appears empty, but Sulley finds to his horror that a human girl has followed him through the door, thinking him to be a giant kitty. Terrified of contamination, he tries to return her, but is forced to hide when Randall Boggs, a competitive co-scarer, emerges from the child's room and surreptitiously returns her door to an unseen door vault. Sulley quickly hides the child and gets hold of his work-partner and pal Mike Wazowski, to figure out the situation. Together at Sulley's home, they discover that being touched by the child is not harmful at all, and that when she laughs, surrounding electrical power surges to unusually high levels. Sulley nicknames the child "Boo" and becomes her caretaker until they can get her back home.
Sulley and Mike disguise Boo as a baby monster and return to Monsters, Inc. the next morning. Mike attempts to get the correct door to return Boo, but the doorkeeper, Roz, refuses his request: Mike has failed to properly return his paperwork. Boo wanders off into the plant, with Sulley giving chase. They accidentally stumble upon Randall and his "scream extractor", a device that extracts the screams directly from a physically restrained child, which requires Randall to actually kidnap one and bring them to the monster world. Sulley takes Boo and attempts to reveal Randall's actions to Waternoose, but is forced to demonstrate his scaring skills to new employees assembled at the plant’s scare simulator before he can do so. When he scares the robot subject, Boo becomes frightened of him, and is revealed as a human. Sulley tries to explain the situation to Waternoose, but comes to realize that Waternoose is actually in on the scream extractor plan, allowing Randall to develop it in order to keep Monsters, Inc. from going out of business. To keep them quiet, Waternoose orders Sulley and Mike exiled to the human world, and gives Boo to Randall to extract her screams to generate more power.
Sulley and Mike, now stranded in the snowy Himalayas in Nepal with its local monster inhabitant, an ever-gleeful Yeti, realize that Boo's life is in danger, and find a nearby Nepali village where they locate a door connected to Monsters, Inc. Scarefloor F (Mike and Sulley's work station). They are just in time to save Boo from the extractor, and attempt to catch Randall, eventually leading to a chase on, across, and through the myriad traveling portals within the cavernous automated door vault, all now activated by Boo's reverberating screams of delight. They eventually triumph once Boo overcomes her fear of Randall and starts beating him with a Wiffle bat. Sulley throws him through a door, and then they smash the door to pieces to prevent him returning. The door is revealed to reside in a trailer in a Southern swamp, and Randall's silhouette is shown passing by the trailer window. A boy and his mom then drive Randell outside, mistaking him for an alligator. Sulley, Mike, and Boo then lure Waternoose into an ingenious trap, forcing him to reveal his intentions on camera at the scare simulator. Waternoose furiously blames Sulley for destroying the entire company as he is arrested, but Roz (revealed to be Agent 001 of the CDA) insists that Boo must return to her world and that her door be destroyed so that she cannot return. Sulley and Mike return Boo to her room and say goodbye to her, and watch sadly as the CDA put her door through a door shredder, reducing it to splinters. Sulley holds onto one undisposed-of splinter as a keepsake.
Later, Sulley has become the CEO of Monsters, Inc., and has changed the company's approach - instead of scaring children, they make them laugh. This generates ten times more power, making both the monsters and children happy. Finally, Mike reveals his own special project to Sulley - he has managed to rebuild Boo's door save the one piece Sulley has kept, and invites him to finish it. Sulley places the last piece and enters the door, where an unseen Boo instantly recognizes him. A closeup of Sulley's surprised grin closes the film.