The membrane-anchored ubiquitin ligase gp78 promotes degradation of misfolded endoplasmic reticulum (ER) proteins and sterol-regulated degradation of HMG-CoA reductase. It was known previously that Ufd1 plays a critical role in ER-associated degradation (ERAD) together with Npl4 and VCP. The VCP-Ufd1-Npl4 complex recognizes polyubiquitin chains and transfers the ubiquitinated proteins to the proteasome. Here we show that Ufd1 directly interacts with gp78 and functions as a cofactor. Ufd1 enhances the E3 activity of gp78, accelerates the ubiquitination and degradation of reductase, and eventually promotes receptor-mediated uptake of low-density lipoprotein. Furthermore, we demonstrate that the monoubiquitin-binding site in Ufd1 is required for the enhancement of gp78 activity and that the polyubiquitin-binding site in Ufd1 is critical for a postubiquitination step in ERAD. In summary, our study identifies Ufd1 as a cofactor of gp78, reveals an unappreciated function of Ufd1 in the ubiquitination reaction during ERAD, and illustrates that Ufd1 plays a critical role in cholesterol metabolism.