Signaling through receptor protein tyrosine phosphatases (RPTPs) can influence diverse processes, including axon development, lymphocyte activation, and cell motility. The molecular regulation of these enzymes, however, is still poorly understood. In particular, it is not known if, or how, the dimerization state of RPTPs is related to the binding of extracellular ligands. Protein tyrosine phosphatase sigma (PTPsigma) is an RPTP with major isoforms that differ in their complements of fibronectin type III domains and in their ligand-binding specificities. In this study, we show that PTPsigma forms homodimers in the cell, interacting at least in part through the transmembrane region. Using this knowledge, we provide the first evidence that PTPsigma ectodomains must be presented as dimers in order to bind heterophilic ligands. We also provide evidence of how alternative use of fibronectin type III domain complements in two major isoforms of PTPsigma can alter the ligand binding specificities of PTPsigma ectodomains. The data suggest that the alternative domains function largely to change the rotational conformations of the amino-terminal ligand binding sites of the ectodomain dimers, thus imparting novel ligand binding properties. These findings have important implications for our understanding of how heterophilic ligands interact with, and potentially regulate, RPTPs.