William J. Sanderson was born in Memphis, Tennessee, to an elementary school teacher mother and a landscape designer father. He holds business (BBA, 1968) and law (J.D., 1971) degrees from the University of Memphis (then known as Memphis State University).
Sanderson has appeared in many movies, and is known for his role in the 1982 classic science fiction film Blade Runner as J. F. Sebastian. Sanderson appeared as one of the mechanics, regulars of the diner in The Rocketeer, who defies Nazi agents looking for the top secret rocket pack. He also portrayed a character named Deuce in an episode of the science fiction television series Babylon 5, and later reprised the role in the television movie Babylon 5: Thirdspace. He also voiced the recurring character Dr. Karl Rossum in Batman: The Animated Series. Sanderson starred in the controversial film Fight for Your Life, which has a strict ban in the United Kingdom.
Sanderson played Larry in Newhart from 1982 to 1990, famous for the catchphrase, "Hi. I'm Larry. This is my brother Darryl. This is my other brother Darryl."
Sanderson returned to television playing E. B. Farnum in the HBO television series Deadwood from 2004 to 2006. His role is a tragicomic hotelier and first mayor of Deadwood. In 2008, Sanderson joined the cast of True Blood playing Sheriff Bud Dearborne. He later played "Oldham", the resident interrogation expert of the DHARMA Initiative in the 10th episode of the fifth season of ABC's series Lost.