After two commercially unsuccessful albums, Third documents the band's deterioration as well as the declining mental state of singer Alex Chilton.

After the commercial failure of Big Star's first two albums, #1 Record (1972) and Radio City (1974), Alex Chilton and Jody Stephens returned to Ardent Studios in late 1974—accompanied by what biographer Bruce Eaton describes as "a large and revolving cast of Memphis musicians"—to record, under producer Jim Dickinson, "a batch of starkly personal, often experimental, and by turns beautiful and haunting songs that were anything but straight-up power pop.

"[6] Ardent's John Fry, producer of the first two albums and also involved with the third, recalled that the sessions were burdened by severe personal issues; Eaton tells how Fry "finally called a halt to the escalating madness" and the album was mastered by Larry Nix on February 13, 1975.

The session sheets have the band name 'Sister Lovers' (Chilton and Stephens were dating Lesa and Holliday Aldridge at the time) clearly written on them.

Dickinson said that Chilton, whose relationship with Aldridge was stormy, "reached a point ... where he started to go back and erase her—there was a lot more of Lesa on the album than there is now".

Numerous reissues by other labels on vinyl and CD would follow, often varying the title, running order, and cover art, as no 'definitive' version had ever been agreed upon by the band.

In addition to the original songs, covers of The Kinks' "Till the End of the Day", eden ahbez's "Nature Boy" and Jerry Lee Lewis' "Whole Lotta Shakin' Goin' On" were variously included or omitted.

In October 2016, Omnivore Recordings released Complete Third, a box set that includes every demo, rough mix, outtake, alternate take, and final master from the Third sessions ever known to exist.

Like Big Star's first two albums, Third/Sister Lovers did not have commercial success at the time of its release but later attracted wider interest.

Reviewing the 1992 reissue, Newsday wrote that "Chilton seems determined to undermine the songs with performances that range from incoherent to disengaged...

"[16] The Los Angeles Times noted that "the tension and sense of individual struggle in the album fit comfortably in the tradition of much of the finest—and most liberating—rock.

"[17] The Orlando Sentinel deemed the album "a stunning collection of eerie, anxious power pop, strikingly produced.

"[14] The Chicago Tribune determined that Third/Sister Lovers "sounds like the soundtrack to a nervous breakdown, with Chilton's voice a fragile squeak, the rockers defined by raggedness and others tending to be slow, haunting and often beautiful.

[21] "Kanga Roo" and "Holocaust" were both covered by This Mortal Coil on the band's debut LP, It'll End in Tears.

In 1984, the Paisley Underground all-star group Rainy Day covered "Holocaust" on its eponymous album, featuring Kendra Smith of Dream Syndicate on lead vocals.

Placebo included its version of "Holocaust" on the "Slave to the Wage" single in 2000 and it can also be found on their compilation album Covers.