Sullivan joined the FBI early in World War II, when he was dispatched by J. Edgar Hoover on an undercover intelligence mission to Spain. Sullivan returned to bureau headquarters in Washington, D.C., and took the first in a series of administrative posts that ultimately included a decade as head of the domestic intelligence division starting in 1961, and a brief tenure as the bureau's third-ranking official behind Hoover, the director, and his longtime friend and confidante, Clyde Tolson. According to his New York Times obituary, Sullivan was "the only liberal Democrat ever to break into the top ranks of the bureau."

Sullivan claimed Hoover's concerns about the American Communist Party were overemphasized when compared to violations of Federal civil rights laws in the segregated south. This friction worsened as Sullivan made his opinions public. Whereas many bureau insiders considered Sullivan the logical successor to Hoover, on October 1, 1971. Sullivan's FBI career ended abruptly after Hoover fired him for insubordination and suspected disloyalty, and ordered the lock on his door changed and his nameplate removed.

Sullivan then became even more vocal about Hoover's controversial counterintelligence programs, collectively labeled COINTELPRO, including some that he himself had conceived and administered. These were intended to spread confusion and dissension among extremist political groups in the U.S., ranging from the Communist Party (CPUSA) on the left to the Ku Klux Klan on the far right. In 1975, he testified before the Senate Intelligence Committee, "Never once did I hear anybody, including myself raise the question, is this course of action which we have agreed upon lawful, is it legal, is it ethical or moral?"

Sullivan was instrumental in the arranging for the mailing of a tape recording in 1964 to Coretta Scott King, that contained secretly taped recordings of her husband Martin Luther King, Jr. speaking with other women. In a memo, Sullivan called King "a fraud, demagogue and scoundrel". He also gave orders to track down fugitive members of the Weather Underground in the early 1970s.

According to his autobiography, The Bureau: Thirty Years in Hoover's FBI, Sullivan felt that Samuel Pierce, later to serve in the Ronald Reagan Administration, would be a better representative for the civil rights movement than King. He wrote the following recommendation in a letter to Hoover:

It should be clear to all of us that Martin Luther King must, at some propitious point in the future, be revealed to the people of this country and to his Negro followers as being what he actually is - a fraud, demagogue and scoundrel. When the true facts concerning his activities are presented, such should be enough, if handled properly, to take him off his pedestal and to reduce him completely in influence. When this is done, and it can be and will be done, obviously much confusion will reign, particularly among the Negro people... The Negroes will be left without a national leader of sufficiently compelling personality to steer them in the proper direction. This is what could happen, but need not happen if the right kind of a national Negro leader could at this time be gradually developed so as to overshadow Dr. King and be in the position to assume the role of the leadership of the Negro people when King has been completely discredited.

For some months I have been thinking about this matter. One day I had an opportunity to explore this from a philosophical and sociological standpoint with an acquaintance whom I have known for some years.... I asked him to give the matter some attention and if he knew any Negro of outstanding intelligence and ability to let me know and we would have a discussion. He has submitted to me the name of the above-captioned person. Enclosed with this memorandum is an outline of (the person's) biography which is truly remarkable for a man so young. On scanning this biography, it will be seen that (Samuel Pierce) does have all the qualifications of the kind of a Negro I have in mind to advance to positions of national leadership....

If this thing can be set up properly without the Bureau in any way becoming directly involved, I think it would be not only a great help to the FBI but would be a fine thing for the country at large. While I am not specifying at this moment, there are various ways in which the FBI could give this entire matter the proper direction and development. There are highly placed contacts of the FBI who might be very helpful to further such a step. These can be discussed in detail later when I have probed more fully into the possibilities.'

Hoover had learned from the SOLO brothers, Morris and Jack Childs, who were members of the Communist Party of the United States (CPUSA), but in fact were double agents working against the Soviet Active Measures program of the KGB, that one of King's consultants, Stanley Levinson, was an important active member of the CPUSA. Annually, the Solo brothers would travel to Moscow to pick up Soviet funding for CPUSA activities and distribute it on their return. Because such contacts suggested the civil rights movement was being co-opted by the CPUSA under the guidance of the KGB's Soviet Active Measures program, Attorney General Robert F. Kennedy ordered the tapping of King's telephone. The telephonic surveillance led to information concerning King's affairs , and the reason why Sullivan thought King unworthy of leading the movement and being "a fraud, demagogue and scoundrel." Realizing the danger to the movement, King's Number Two man, Rev. Ralph Abernathy pleaded, on numerous occasions, that King cease and desist such behavior, as he was putting at risk the credibility of the movement. King refused, saying he did not care what people or the FBI thought. Abernathy wrote in his autobiography When the Walls Came Tumbling Down that King's problem with women plagued him even the night before his 1968 assassination, when he was visited by two women, ending up in a physical brawl with one of them. Eventually, King's behavior led J. Edgar Hoover to publicly call King a "notorious liar."

President Lyndon Johnson, not questioning the reason for Hoover's statement but realizing the political impact for the next election, forced Hoover to apologize. Hoover and King did meet at FBI Headquarters, but no one really knows what happened. Some say Hoover had all of King's files and telephone transcripts on his desk. In the last analysis, it wasn't Hoover who was responsible for gathering all the information on King, but Sullivan.

After Hoover's death in May, 1972, Attorney General Richard Kleindienst appointed Sullivan director of the newly created Office of National Narcotics Intelligence under the Department of Justice in June, 1972. Sullivan had hoped to replace Hoover as the bureau's director, but was passed over by President Richard Nixon in favor of loyalist L. Patrick Gray.

The following passages were published in 2007 by Robert D. Novak in his memoir, The Prince of Darkness.

"Sullivan came to our house in the Maryland suburbs in June 1972 for lunch and a long conversation about my plans for a biography of Hoover (a project I abandoned as just too ambitious an undertaking). Before he left, Bill told me someday I probably would read about his death in some kind of accident, but not to believe it. It would be murder.

"On November 9, 1977, twenty minutes before sunrise, sixty-five-year-old William C. Sullivan was walking through the woods near his retirement home in Sugar Hill, New Hampshire, on the way to meet hunting companions. Another hunter, a twenty-two-year-old man using a telescopic sight on a .30 caliber rifle, said he mistook Sullivan for a deer, shot him in the neck, and killed him instantly... The authorities called it an accident, fining the shooter (the son of a state policeman) five hundred dollars and taking away his hunting license for ten years. Sullivan's collaborator on his memoir, the television news writer Bill Brown, wrote that he and Sullivan's family were "convinced" that the death was "accidental."

"Sullivan's death did not prevent publication of the memoir, telling all about the disgrace of J. Edgar Hoover and the FBI. After Watergate, with all the principals dead or out of office, it received little attention."

The hunter who shot Sullivan was named Robert Daniels, Jr. Sullivan was one of six current or former FBI officials who died in a six-month period in 1977.

Sullivan is buried in his family's plot at St. Michael Cemetery in Hudson, Massachusetts, with his wife, Marion Hawkes, as well as his parents, sister and other relatives.