The human transmembrane molecule LAR is a protein tyrosine phosphatase (PTPase) with a cell adhesion molecule-like extracellular receptor region. The structure of LAR hinted at its involvement in the regulation of tyrosine phosphorylation through cell-cell or cell-matrix interactions. We show here that LAR is expressed on the cell surface as a complex of two non-covalently associated subunits derived from a proprotein. The LAR E-subunit contains the cell adhesion molecule-like receptor region, while the LAR P-subunit contains a short segment of the extracellular region, the transmembrane peptide and the cytoplasmic PTPase domains. Proprotein processing occurs intracellularly. Analysis of LAR mutants suggested that cleavage occurs in the LAR extracellular region at a paired basic amino acid site by a subtilisin-like endoprotease. A single amino acid substitution at this site blocked LAR proprotein cleavage. The LAR E-subunit is shed during cell growth, suggesting that LAR receptor shedding may be a mechanism for regulating PTPase function. The use of immunohistochemistry techniques on human tissues demonstrated the expression of LAR by various cell lineages, including epithelial cells, smooth muscle cells and cardiac myocytes. The LAR gene is mapped to chromosome 1, region p32-33, which contains candidate tumor suppressor genes.