Sphingomyelin and cholesterol are essential lipids that are enriched in plasma membranes of animal cells, where they interact to regulate membrane properties and many intracellular signaling processes. Despite intense study, the interaction between these lipids in membranes is not well understood. Here, structural and biochemical analyses of ostreolysin A (OlyA), a protein that binds to membranes only when they contain both sphingomyelin and cholesterol, reveal that sphingomyelin adopts two distinct conformations in membranes when cholesterol is present. One conformation, bound by OlyA, is induced by stoichiometric, exothermic interactions with cholesterol, properties that are consistent with sphingomyelin/cholesterol complexes. In its second conformation, sphingomyelin is free from cholesterol and does not bind OlyA. A point mutation abolishes OlyA's ability to discriminate between these two conformations. In cells, levels of sphingomyelin/cholesterol complexes are held constant over a wide range of plasma membrane cholesterol concentrations, enabling precise regulation of the chemical activity of cholesterol.