The inner mitochondrial membrane plays a crucial role in cellular lipid homeostasis through biosynthesis of the non-bilayer-forming lipids phosphatidylethanolamine and cardiolipin. In the yeast Saccharomyces cerevisiae, the majority of cellular phosphatidylethanolamine is synthesized by the mitochondrial phosphatidylserine decarboxylase 1 (Psd1). The biogenesis of Psd1 involves several processing steps. It was speculated that the Psd1 precursor is sorted into the inner membrane and is subsequently released into the intermembrane space by proteolytic removal of a hydrophobic sorting signal. However, components involved in the maturation of the Psd1 precursor have not been identified. We show that processing of Psd1 involves the action of the mitochondrial processing peptidase and Oct1 and an autocatalytic cleavage at a highly conserved LGST motif yielding the α- and β-subunit of the enzyme. The Psd1 β-subunit (Psd1β) forms the membrane anchor, which binds the intermembrane space-localized α-subunit (Psd1α). Deletion of a transmembrane segment in the β-subunit results in mislocalization of Psd1 and reduced enzymatic activity. Surprisingly, autocatalytic cleavage does not depend on proper localization to the inner mitochondrial membrane. In summary, membrane integration of Psd1 is crucial for its functionality and for maintenance of mitochondrial lipid homeostasis.