Reinhardt was born Maximilian Goldmann in the spa town of Baden near Vienna, the son of Wilhelm Goldmann (1846–1911), a Jewish merchant from Stomfa, Hungary, and his wife Rosa née Wengraf (1851–1924). Having finished school, he began an apprenticeship at a bank, but already took acting lessons. In 1890, he gave his debut on a private stage in Vienna with the artist's name Max Reinhardt (possibly after the protagonist Reinhard Werner in Theodor Storm's novella Immensee). In 1893 he performed at the re-opened Salzburg City Theatre and one year later joined the Deutsches Theater ensemble under director Otto Brahm in Berlin.
In 1901, Reinhardt together with Friedrich Kayßler and several other theatre colleagues founded the Schall und Rauch ("Sound and Smoke") Kabarett stage in Berlin. Re-opened as Kleines Theater ("Little Theatre") it was the first of numerous stages, where Reinhardt worked as a director until the beginning of Nazi rule in 1933. From 1903 to 1905, he managed the Neues Theater (present-day Theater am Schiffbauerdamm) and in 1906 acquired the Deutsches Theater in Berlin. In 1911, he premiered with Karl Vollmöller's The Miracle at Olympia, London gaining international reputation.
By employing powerful staging techniques, and harmonising stage design, language, music and choreography, Reinhardt introduced new dimensions into German theatre. The Max Reinhardt Seminar in Vienna, which is arguably the most important German-language acting school, was installed implementing his ideas. In 1910, Siegfried Jacobsen wrote his book entitled "Max Reinhardt". In 1914, he was persuaded to sign the Manifesto of the Ninety-Three, defending the German invasion of Belgium. He was signatory 66; he later expressed regret at signing.
From 1915 to 1918, Reinhardt also worked as director of the Volksbühne theatre and after World War I re-opened the Großes Schauspielhaus (after World War II renamed into Friedrichstadtpalast) in 1919, following its expressionist conversion by Hans Poelzig. By 1930, he ran 11 stages in Berlin and, in addition, managed the Theater in der Josefstadt in Vienna from 1924 to 1933. In 1920, Reinhardt established the Salzburg Festival with Richard Strauss and Hugo von Hofmannsthal, notably directing an annual production of the morality play Everyman about God sending Death to summon a representative of mankind for judgment. In the United States, he successfully directed The Miracle in 1924, and a popular stage version of Shakespeare's A Midsummer Night's Dream in 1927.
Reinhardt followed that success by directing a film version in 1935 using a mostly different cast, that included James Cagney, Mickey Rooney, Joe E. Brown and Olivia de Havilland, amongst others. Mickey Rooney and Olivia de Havilland had also appeared in Reinhardt's 1934 stage production, which was staged at the Hollywood Bowl. The Nazis banned the film because of the Jewish ancestry of both Reinhardt and Felix Mendelssohn, whose music (arranged by Erich Wolfgang Korngold) was used throughout the film.