Loss-of-function mutations in CLN3 cause juvenile Batten disease, featuring neurodegeneration and early-stage neuroinflammation. How loss of CLN3 function leads to early neuroinflammation is not yet understood. Here, we have comprehensively studied microglia from Cln3∆ex7/8 mice, a genetically accurate disease model. Loss of CLN3 function in microglia leads to lysosomal storage material accumulation and abnormal morphology of subcellular organelles. Moreover, pathological proteomic signatures are indicative of defects in lysosomal function and abnormal lipid metabolism. Consistent with these findings, CLN3-deficient microglia are unable to efficiently turnover myelin and metabolize the associated lipids, showing defects in lipid droplet formation and cholesterol accumulation. Accordingly, we also observe impaired myelin integrity in aged Cln3∆ex7/8 mouse brain. Autophagy inducers and cholesterol-lowering drugs correct the observed microglial phenotypes. Taken together, these data implicate a cell-autonomous defect in CLN3-deficient microglia that impacts their ability to support neuronal cell health, suggesting microglial targeted therapies should be considered for CLN3 disease.