Recently, human genetic studies identified an association of single‐nucleotide polymorphisms (SNPs) in the HSD17B13 (17‐beta hydroxysteroid dehydrogenase 13) gene with alcoholic and nonalcoholic fatty liver disease (NAFLD) development. Mutant HSD17B13 variants devoid of enzymatic function have been demonstrated to be protective from cirrhosis and liver cancer, supporting the development of HSD17B13 as a promising therapeutic target. Previous studies have demonstrated HSD17B13 is a lipid droplet (LD) associated protein. However, the critical domains that drive LD targeting or determine the enzymatic activity are yet to be defined. Here we used mutagenesis to generate multiple truncated and point-mutated proteins and were able to demonstrate in vitro that the N-terminal hydrophobic domain, PAT-like domain, and a putative α-helix/β-sheet/α-helix domain in HSD17B13 are all critical for LD targeting. Similarly, we characterized the predicted catalytic, substrate-binding, and homodimer interaction sites and found them essential for the enzymatic activity of HSD17B13, in addition to our previous identification of amino acid P260 and cofactor binding site. In conclusion, we identified critical domains and amino acid sites that are essential for the LD localization and protein function of HSD17B13, which may facilitate understanding of its function and targeting of this protein to treat chronic liver diseases.