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In 1904, Gus Mears acquired the Stamford Bridge athletics stadium with the aim of turning it into a football ground. An offer to lease it to nearby Fulham was turned down, so Mears opted to found his own club to use the stadium. As there was already a team named Fulham in the borough, the name of the adjacent borough of Chelsea was chosen for the new club; names like Kensington FC, Stamford Bridge FC and London FC were also considered. Chelsea were founded on 10 March 1905 at The Rising Sun pub (now The Butcher's Hook),opposite the present-day main entrance to the ground on Fulham Road, and were elected to the Football League shortly afterwards.

The club won promotion to the First Division in their second season, and yo-yoed between the First and Second Divisions in their early years. They reached the 1915 FA Cup Final, where they lost to Sheffield United at Old Trafford, and finished third in the First Division in 1920, the club's best league campaign to that point. Chelsea attracted large crowds and had a reputation for signing big-name players, but success continued to elude the club in the inter-war years.

Former Arsenal and England centre-forward Ted Drake became manager in 1952 and proceeded to modernise the club. He removed the club's Chelsea pensioner crest, improved the youth set-up and training regime, rebuilt the side with shrewd signings from the lower divisions and amateur leagues, and led Chelsea to their first major trophy success – the League championship – in 1954–55. The following season saw UEFA create the European Champions' Cup, but after objections from The Football League and the FA Chelsea were persuaded to withdraw from the competition before it started. Chelsea failed to build on this success, and spent the remainder of the 1950s in mid-table. Drake was dismissed in 1961 and replaced by player-coach Tommy Docherty.