Besides your own character, allies can also be equipped with items. However, after you place equipment on an ally, it cannot be removed. It can only be replaced with new equipment. Do not use rare equipment on your allies.
Party effect
Party effects are passive bonuses that are conveyed to all of its current members. You must have specific allies on your team to activate a party effect. You can check all of them by tapping the "Party Effects" button on the bottom left corner of the "Allies" screen.
Upgrades
Extra allies that will not be used can be sacrificed to power up your allies you wish to keep.