To encourage entrepreneurial activity, governments around the world have optimized procedures and reduced the time and costs to set up a business. Recently, another measure has emerged: lowering or eliminating the legal capital required to set up a new venture.

In this study, we evaluate a Portuguese legal capital reform by examining its effects on entry and job creation, but also in the type of firms that are more likely to enter the market and how firm initial funding was affected by the reform. We contrast the theoretical arguments in favor and against the legal capital requirement. The capital invested protects creditors’ claims and signals the shareholders’ intentions to start a business. Nevertheless, as it disregards the business characteristics, the legal capital does not safeguard creditors and it creates a barrier for starting a business.