When you create a virtual machine, you actually have to provide an installable media disc to load the virtual machine. Rather than actually using a hard drive partition, the virtualization technology loads everything within a couple of files...and mounts these files and presents them as hard drives to the virtual machine.
You can take what you already have and convert it..using tools like the free VMWare Converter tool. This will allow you to take a physical computer running XP and turn it into a virtual machine instead. You do have to run this from another computer though and connect over a network to the machine running XP to make the conversion. At the end, you end up with a vmdk file (which is that single file that contains the image of your physical machine).
The other issue you will have here with a virtual machine, is that in order to use it, your other family members will have to boot into your partition, use your operating system and then launch their operating system. Thus, they potentially put the security and stability of your OS at risk...if you don't trust that they know what they are doing.