Born in Larbert, Stirlingshire, Scotland to Alexander and Isabella (née Henderson) Finlayson, he worked as a tinsmith before pursuing an acting career. After the death of both his parents, he emigrated to the U.S. in 1911 at the age of 24 with his brother Robert.
He married Emily Cora Gilbert, an American citizen from Iowa, in 1919 and became a U.S. citizen in 1942.
As part of John Clyde's company, he played the part of Jamie Ratcliffe in Jeanie Deans at the Theatre Royal in Edinburgh in 1910. He played the role of a detective disguised as a teuchter (person originating from the Scottish West Highlands or Western Isles) in the play The Great Game at Daly's Theatre, New York in May 1912: "James Finlayson had an excellent opportunity, which he did not miss, for developing two characters in his one role – the simple, naive Scotsman and the artful, determined detective. The remarkable thing is that he managed to do them both at the same time."
He later won the role of Rab Biggar in the popular Broadway production of Bunty Pulls the Strings by Graham Moffat, and dropped out of a country-wide theatrical tour in 1916 to pursue a career in Hollywood.
Arriving in Los Angeles in 1916, he found work at L-KO and Thomas H. Ince's studio. In October 1919, he signed a contract with the Mack Sennett Comedies Corporation. He appeared in numerous Sennett-produced comedies, including the Keystone Kops.
The promotional newspaper article for the 1920 premiere of Sennett's Down on the Farm, refers to Finlayson as "legitimate and screen player of international celebrity" and of his performance says: "The villian [sic] in the case – a sort of cross between a Turkish Don Juan and a 'loan shark' – is played with rare power and comic results of seriousness by James Finlayson". As a freelance actor late in his career, he made some of his final films in the UK. He played bit parts in films such as Foreign Correspondent, To Be or Not to Be, and Royal Wedding, his last film before his death in 1953.
However, Finlayson is most remembered for his work at the Hal Roach Studios. In the mid-1920s, Roach attempted to make a top-billed star out of Finlayson, but the effort was unfocused and he never caught on. The next step came in 1927 when the All-Star Comedy series gave Finlayson equal billing with up-and-coming co-stars Stan Laurel and Oliver Hardy, comedian Edna Marion, and others; some studio publicity even referred to Finlayson, Hardy and Laurel as a "famous comedy trio". But Roach staff producer and future multi-Oscared director Leo McCarey recognized the great potential of a Laurel-and-Hardy pairing and began developing their characters and expanding their roles toward that end; by the autumn of 1928, Laurel and Hardy was a formal studio series with its own production prefixes while the All-Star Comedy series – and Finlayson's equal co-billing – were things of the past. Yet so memorable an antagonist was he to "The Boys" that even with his diminished billing, he was still "considered by many to be an indispensable part of the Laurel & Hardy team."
Altogether, Finlayson played roles in 33 Laurel and Hardy films, usually as a villain or an antagonist, notably in the celebrated films Big Business (1929) and Way Out West (1937). He also starred alongside Stan Laurel in 19 films and opposite Oliver Hardy in five films before Laurel and Hardy were teamed together. He appeared in dozens of Roach Studio films, with Charley Chase, Glenn Tryon, Snub Pollard, and Ben Turpin. He was also in several Our Gang shorts, notably Mush and Milk, in which he and Spanky McFarland match wits in a comically adversarial phone conversation.
English actress Stephanie Insall and Finlayson regularly took breakfast together and had for the past 20 years. However, on the morning of 9 October 1953, Finlayson did not turn up at the usual time. Knowing that he had been ill from flu recently, Miss Insall went to his home where she discovered his body. Finlayson had died of a heart attack. He was 66 years old.
One of Finlayson's trademarks was a drawn out "dohhhhhhh!" Finlayson had used the term as a minced oath to stand in for the word "Damn!" This would later inspire Dan Castellaneta, the voice actor of Homer Simpson. During the voice recording session for a Tracey Ullman Show short, Castellaneta was required to utter what was written in the script as an "annoyed grunt". He rendered it as a drawn out "dohhhhhhh". This was inspired by Finlayson. Matt Groening felt that it would better suit the timing of animation if it were spoken faster. Castellaneta then shortened it to a quickly uttered "D'oh!"