Nilsson was born in Bedford-Stuyvesant, Brooklyn in 1941. His paternal grandparents were Swedish circus performers and dancers, especially known for their "aerial ballet" (which is the title of one of Nilsson's albums). His maternal grandparents were the cornerstone of his young life. While his grandmother played piano, his grandfather Charlie supported the family in a tiny railroad apartment on Jefferson St in Brooklyn.

Nilsson's disregard for commercialism in favor of artistic satisfaction showed itself in his next release, A Little Touch of Schmilsson in the Night (1973). Performing a selection of pop standards by the likes of Berlin, Kalmar and Ruby, Nilsson sang in front of an orchestra arranged and conducted by veteran Gordon Jenkins in sessions produced by Derek Taylor. This musical endeavor did not do well commercially. The session was filmed, and broadcast as a television special by the BBC in the UK.  1973 found Nilsson back in California, and when John Lennon moved there during his separation from Yoko Ono, the two musicians rekindled their earlier friendship. Lennon was intent upon producing Nilsson's next album, much to Nilsson's delight. However, their time together in California became known much more for heavy drinking than it did for musical collaboration. In a widely publicized incident, the two were ejected from the Troubadour nightclub in West Hollywood for drunken heckling of the Smothers Brothers.  To make matters worse, at a late night party and jam session during the recording of the album, attended by Lennon, McCartney, Danny Kortchmar, and other musicians, Nilsson ruptured a vocal cord, but he hid the injury for fear that Lennon would call a halt to the production. The resulting album was Pussy Cats. In an effort to clean up, Lennon, Nilsson and Ringo Starr first rented a house together, then Lennon and Nilsson left for New York. After the relative failure of his latest two albums, RCA Records considered dropping Nilsson's contract. In a show of friendship, Lennon accompanied Nilsson to negotiations, and both intimated to RCA that Lennon and Starr might want to sign with them, once their Apple Records contracts with EMI expired in 1975, but would not be interested if Nilsson were no longer with the label. RCA took the hint and re-signed Nilsson (adding a bonus clause, to apply to each new album completed), but neither Lennon nor Starr signed with RCA.  Nilsson's voice had mostly recovered by his next release, Duit on Mon Dei (1975), but neither it nor its follow-ups, Sandman and ...That's the Way It Is (both 1976), met with chart success. Finally, Nilsson recorded what he later considered to be his favorite album Knnillssonn (1977). With his voice strong again, and his songs exploring musical territory reminiscent of Harry or The Point!, Nilsson anticipated Knnillssonn to be a comeback album. RCA seemed to agree, and promised Nilsson a substantial marketing campaign for the album. However, the death of Elvis Presley caused RCA to ignore everything except meeting demand for Presley's back catalog, and the promised marketing push never happened. This, combined with RCA releasing a Nilsson Greatest Hits collection without consulting him, prompted Nilsson to leave the label.

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