BT has bowed to demands by the telecoms regulator Ofcom to legally separate Openreach, which runs the UK's broadband infrastructure.
Ofcom said that Openreach will become a distinct company with its own staff, management and strategy "to serve all of its customers equally".
It must consult with customers such as Sky and TalkTalk on major investments.
Ofcom boss Sharon White told that "we can now expect better service from Openreach".
Openreach controls the fibre connections, ducts and pipes behind the UK's broadband infrastructure and sells access to BT's rivals, such as TalkTalk and Sky.
The regulator had threatened to force BT to legally separate Openreach.
However, Ofcom said on Friday that the company had agreed to all of the changes needed to address its competition concerns.
"As a result, Ofcom will no longer need to impose these changes through regulation. The reforms have been designed to begin this year."
BT's rivals such as Sky, TalkTalk and Vodafone, which use Openreach's network to offer broadband to consumers, have long complained of high charges, poor service and failure to invest in the division.
Ms White called it a "significant day" for phone and broadband users and pledged to "carefully monitor" how the revamped Openreach performs.
Sky welcomed the announcement: "A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs. It's important that today's agreement is now implemented by BT in good faith and without delay."
Dido Harding, chief executive of TalkTalk, said: "We hope this is the start of a new deal for Britain's broadband customers, who will be keen to see a clear timetable from Openreach setting out when their services will improve."
Vodafone said it is "an encouraging start".
Culture Secretary Karen Bradley said: "Now we need to see this deal implemented, along with significant improvements to Openreach's service standards, and increased investment by Openreach in the country's digital infrastructure."
BT chief executive Gavin Patterson said the deal, reached after two years of negotiations with Ofcom, meant Openreach would have its own board and make its own investment decisions. However, he admitted that BT would set the overall budget.
He told that "The BT board will set the annual budget. As the 100% shareholder, the owner of the company that's not unreasonable."