Phospholipids are key components of cellular membranes and are emerging as important functional regulators of different membrane proteins, including pentameric ligand-gated ion channels (pLGICs). Here, we take advantage of the prokaryote channel ELIC (Erwinia ligand-gated ion channel) as a model to understand the determinants of phospholipid interactions in this family of receptors. A high-resolution structure of ELIC in a lipid-bound state reveals a phospholipid site at the lower half of pore-forming transmembrane helices M1 and M4 and at a nearby site for neurosteroids, cholesterol or general anesthetics. This site is shaped by an M4-helix kink and a Trp-Arg-Pro triad that is highly conserved in eukaryote GABA and glycine receptors. A combined approach reveals that M4 is intrinsically flexible and that M4 deletions or disruptions of the lipid-binding site accelerate desensitization in ELIC, suggesting that lipid interactions shape the agonist response. Our data offer a structural context for understanding lipid modulation in pLGICs.