The former Reds player and manager was recognised for his services to football, as well as his role supporting Hillsborough victims and his charity work with the Marina Dalglish Appeal.
Dalglish, who won the European Cup three times during his playing career at Liverpool and also found success with Celtic, said that he is "humbled but gratified" by his knighthood.
"I thought it was a tax bill," he told BBC Sport. "For the family, it's a huge honour."
Other sporting figures recognised in the Queen's Birthday Honours list include world heavyweight boxing champion Anthony Joshua, two-time Olympic skeleton champion Lizzy Yarnold, and Bournemouth striker Jermain Defoe, who were handed OBEs.