The town Thorlakshofn was named after St. Thorlakur, bishop at Skalholt (1133–1193). There are two stories behind the town's name. One says that this was the place where bishop Thorlakur landed when he returned from his consecration in 1178. The other says that the owner of the land was in trouble at sea, and called upon Thorlakur for help. When he landed, he gave the land to Skalholt cathedral. The place was originally called Ellidahofn.

Fishing boats have put to sea from Thorlakshofn for centuries. During the days when fishermen rowed out to sea, a fleet of 20–30 boats was common, and the population swelled to three or four hundred during the fishing season. The modern town developed around the successful Meitilll hf. fisheries company in the middle of the last century. The population increased again in the 1970’s after an eruption on the island Heimaey.

Thorlakshofn has one of two existing harbours of the south coast. The other one is the estuary harbour of the town Hofn in the Southeast. Thorlakshofn is the export harbour for the Southwestern Lowlands and the harbour for the Westman Islands' car ferry. The most important export products are fish products and rhyolite pumice. The town is still among the most important fishing and fish processing towns of the country.

There is a tourist information centre at the library in the Town hall. A regular coach service runs between Reykjavík and Thorlakshofn, and there are regular ferry connections with the Westman Islands from the harbour. Work will be carried out in 2007–08 on a modern, fully-equipped sports facility, swimming pool and a campsite in Thorlakshofn.

The distance from the capital is about 51 km.