Souls are the incarnate manifestation of life energy. As such, they contain a vast amount of power. Their power is so great, in fact, that they serve as currency on the Material Plane for creatures of power and influence.
Souls can be used as spell components, and they can also replace experience point expenditures when creating magic items. Normal souls are the equivalent of 10 experience points needed to create an item.
To use a soul in any way, it must be properly prepared and stored. The best way to do this is in a proper receptacle, such as the gem involved in a soul bind or trap the soul spell, or the storage object used in an imprison soul spell. The dark altar stone magic item is also useful in this regard. Subdued or captured larvae, or other extraplanar spirits of the dead (often called petitioners), can serve as souls if properly prepared. Even incorporeal undead can be used in this way if they can be imprisoned somehow.