Lignin, a major constituent of lignocellulosic biomass, is the largest natural source of aromatic molecules and thus is an attractive feedstock for renewable chemical production. Direct incorporation of isolated lignin into materials has long been researched due to the idea's simplicity and the scheme's potentially high atom economy. However, due to its high chemical reactivity lignin is difficult to isolate without having it undergo uncontrolled condensation and repolymerization, which greatly hinder its ease of incorporation into polymers and other materials. Therefore, controlled chemical modifications have been and are being developed to increase lignin's compatibility with existing materials. This review presents the latest advances in lignin extraction and functionalization and their potential for improving the production of lignin-based materials.