In this work, we first synthesized modified cellulose nanocrystals (MCNC) with 2,4-toluene diisocyanate and 9,10-dihydro-9-oxa-10-phosphaphenanthrene-10-oxide via a two-step in-situ polymerization method, and then incorporated it with shape memory polyurethane (SMPU) to fabricate composite. It was found that the urethane chains and phosphorus-containing flame retardant were covalently grafted onto the cellulose nanocrystals surface, and the MCNC exhibited good dispersion level in the SMPU matrix. Due to the crystallization-induced and flame retardant effects of the prepared MCNC, it could be acted as a multifunctional reinforcer in SMPU composites. Noticeably, the most balanced improvements in crystallization, shape memory, mechanical, thermal stability, and flame retardancy properties of composites were observed with the incorporation of 3 wt% MCNC. Shape memory experiment demonstrated that the SMPU-MCNC3 composite exhibited admirable thermal induced shape memory behavior, and its shape fixity and shape recovery ratios were maintained above 90% after five cycles. More importantly, the SMPU-MCNC3 composite showed well balanced mechanical (σ b = 13.1 MPa, ε b = 189.3%), limiting oxygen index (23.8%), and UL-94 rating (V-2) among the prepared polyurethane films. In addition, the representative SMPU-MCNC3 showed obviously reductions in heat and smoke production during combustion as compared to the neat SMPU. The present work offers a promising route to fabricate shape memory polyurethane composites with versatile functions.