Theus played 4 ½ of his 13-year NBA career with the Kings, including their inaugural season in 1985.
He held the same post with New Mexico State the last two years, guiding the Aggies last season to their first NCAA Tournament appearance since 1999.
Theus signed a reported three-year, $6 million contract. He replaces Eric Musselman, who was fired April 20 after just one season.
Sacramento went 33-49 last season, missing the playoffs for the first time since the 1997-98 campaign.
Theus spent two seasons as an assistant to Louisville Coach Rick Pitino.
"Reggie is a coach who has a tremendous passion and love for the game of basketball," said Kings' co-owner Joe Maloof on the team's Web site. "He's got a terrific work ethic, and I think that, combined with his passion for the game, will help lead us into the future.