In Drosophila, dosage compensation of X‐linked genes is achieved by transcriptional upregulation of the male X chromosome. Genetic and biochemical studies have demonstrated that male‐specific lethal (MSL) proteins together with roX RNAs regulate this process. Here, we show that MSL‐3 is essential for cell viability and that three domains in the protein have distinct roles in dosage compensation. The chromo‐barrel domain (CBD) is not necessary for MSL targeting to the male X chromosome but is important for male viability and equalization of X‐linked gene transcription. The polar region cooperates with the CBD in MSL‐3 function, whereas the MRG domain is responsible for targeting the protein to the X chromosome. Our results demonstrate that MSL‐3 localization to the male X chromosome and transcriptional upregulation of X‐linked genes are two separable functions of the MSL‐3 protein.