"The Kid" is the talented but troubled frontman of his Minneapolis-based band, The Revolution (band). To escape his difficult home life – his father is verbal abuse and physical abuse, and his mother is emotional abuse – he spends his days rehearsing and his nights performing at the First Avenue (nightclub). First Avenue's three house band slots are held by The Revolution, the flashy Morris Day and his group The Time (band), and Dez Dickerson and his group The Modernaires. Morris, aware that The Revolution's guitarist Wendy and keyboardist Lisa are frustrated by the Kid's unwillingness to play their compositions, lobbies Billy Sparks, the nightclub's owner, to replace The Revolution with a girl group which Morris is already forming. He targets the Kid's girlfriend Apollonia—an aspiring singer and new arrival in Minneapolis—to lead his group, and tries to persuade her that the Kid won't help her because he's too focused on himself. She eventually joins Morris's group, which Morris names Apollonia 6. When she reveals her partnership to the Kid, he becomes furious and slaps her, as his father had struck him earlier.
The plot continues with The Kid, living future life as an upbeat performer and co-owner of a club, Glam Slam, which was willed to him from Billy, who was the owner of First Avenue (nightclub) in the first film. Solitary and lovelorn, he spends his personal time composing songs, and writing letters to his deceased father. The other co-owner who was included in the will is Morris (Morris Day), his rival who now also owns his own club, Pandemonium, while desiring control of the other two clubs in the Seven Corners area, which are Melody Cool and the Clinton Club. Needing to pay the mayor of Seven Corners $10,000, Morris attempts to extort The Kid – by threatening to take full ownership of Glam Slam. Making matters more interesting is the arrival of Aura, an angel sent from Heaven to sway both Morris and The Kid into leading more righteous lives – while dealing with their attraction to her. As The Kid continues to show resistance, Morris begins to embarrass him by way of performances with The Original 7ven, to steal The Kid's customers. Losing clientele and having his club defamed by Morris's henchmen, The Kid decides to challenge Morris to a music battle for ownership of Glam Slam.