During spinal cord development, Sonic hedgehog (Shh), secreted from the floor plate, plays an important role in the production of motor neurons by patterning the ventral neural tube, which establishes MN progenitor identity. It remains unknown, however, if Shh signaling plays a role in generating columnar diversity of MNs that connect distinct target muscles. Here, we report that Shh, expressed in MNs, is essential for the formation of lateral motor column (LMC) neurons in vertebrate spinal cord. This novel activity of Shh is mediated by its downstream effector ARHGAP36, whose expression is directly induced by the MN-specific transcription factor complex Isl1-Lhx3. Furthermore, we found that AKT stimulates the Shh activity to induce LMC MNs through the stabilization of ARHGAP36 proteins. Taken together, our data reveal that Shh, secreted from MNs, plays a crucial role in generating MN diversity via a regulatory axis of Shh-AKT-ARHGAP36 in the developing mouse spinal cord.