Yang launched Yahoo along with David Philo in 1995.
The departure comes just two weeks after Yahoo hired former PayPal executive Scott Thompson as CEO.
Yang took heat from many investors after he rejected a $47 billion takeover bid from Microsoft in 2008.
One analyst believes other buyers might be interested.
"That's a tough nut to crack; so far the name that comes up most often is AliBaba, there's always the question of whether Microsoft will come back, Steve Mauer has said they're not interested in Yahoo right now, but that might different with Yang gone and Yahoo firmly in play, you never know," CNET Executive Editor Molly Wood said.
In a letter to Yahoo Board Chairman Roy Bostock, Yang wrote, "My time at Yahoo!, from its founding to the present, has encompassed some of the most exciting and rewarding experiences of my life. However, the time has come for me to pursue other interests outside of Yahoo!."
Yang is also stepping down from the boards of China's Alibaba Group and Yahoo Japan. Yahoo is negotiating to sell its stakes in both companies.
Yang is also giving up his title as "chief Yahoo." The Associated Press contributed to this report