The palazzo was built in the early 15th century by the Visconti family, who then gave it to Francesco Bussone, known as Carmagnola. After the unification of Italy, it became the seat of the State Property Office and later of the Registry Office. Between 1890 and 1893 the façade was renovated.

In 1931, an agreement sanctioned the return of Palazzo Carmagnola to municipal ownership and from 1937 it housed the recreation rooms of Opera Nazionale Dopolavoro. A space was created for theatre performances, which in 1940 was opened to the public as Cinema Broletto.

In the summer of 1944, the Autonomous Mobile Legion 'Ettore Muti' was established here. The Muti Legion was named after the aviator and federal officer who was killed during the Badoglian period, when Marshal Badoglio ruled. The Legion had been set up as an action squad in September 1943, on the initiative of the Francesco Colombo, who had enlisted early fascists and former inmates. They had been responsible for so many violent actions that the federation planned its dissolution, but this was later reversed due to the death of the squadrista Resega.

In March 1944, the Legion was incorporated into the PS and deployed against strikers; from July it took on the new and final name of 'Legione Autonoma di Polizia Ettore Muti'. It then took up residence in Palazzo Carmagnola, where the headquarters, the political office and all the services (administrative office, armoury, garage) were located.

On 25 April 1945, during the general uprising, the 120th Garibaldi Brigade occupied the palace, while the militiamen headed towards Como. Having failed to mediate with the CLN (National Liberation Committee), the column disbanded in Cernobbio. Colombo, captured by partisans, was shot in Lenno on 28 April.

In January 1947, the city council approved the transformation of the former Cinema Broletto into a theatre, managed directly by the public body, in the form of the Teatro Stabile (the first in Italy). The direction was entrusted to Paolo Grassi and Giorgio Strehler. The new hall - which became one of Milan's pivotal cultural venues - was inaugurated on 14 May 1947 with the opera L'albergo dei poveri by M. Gorkij. In 1952, the Piccolo was refurbished with an extension of the stage, designed by architects Rogers and Zanuso, .

In 2009 it underwent a new restoration with the recovery of the cloister. Today, the Piccolo has moved its headquarters, but Palazzo Carmagnola still houses the Sala Grassi.