He has joined as deputy chairman after claiming he could no longer serve under the leadership of UKIP's Gerard Batten.
His move comes amid his desire to support a system with less government interference, lower taxes and individual empowerment, the party said.
Mr Etheridge said: "I have always campaigned on libertarian values. UKIP has turned its back on those values, but I never will.
“I am excited to get to work with a truly libertarian party and hopefully introduce libertarian ideas to the great debates of our time especially Brexit.”
The politician brought an end to his seven years with UKIP last week, citing his 'despair' at the extremist direction of the leadership.
In his resignation letter to Mr Batten, he claimed the leader had 'changed the party beyond all recognition'.
Mr Etheridge, who backed Mr Batten in this year's leadership election before relations between them turned sour, said he plans to stay in the EFDD group in the EU.
Party leader Adam Brown said: "We are delighted to have Bill join us. We often speak to members of other parties who consider themselves Libertarian and have become increasingly dissatisfied with politics within these parties and are defecting to us.
"It is great to be able to give this Libertarian a voice in our party and we welcome those from other parties, who consider themselves Libertarians, to do the same.”
Former Dudley councillor Mr Etheridge has stood for Police and Crime Commissioner, local council four times – including victory in 2014 – and MP twice.
Party chairman Andrew Withers said: "I see this move as a sea change in our profile and welcome Bill’s campaigning expertise and also thank him for his hospitality in Brussels last month.
"The Libertarian Party advocate a written constitution similar to that of Switzerland, where state control ends and the rights and responsibilities of citizens begin.”