Rhomboid, a polytopic membrane serine protease, represents a unique class of proteases that cleave substrates within the transmembrane domain. Elucidating the mechanism of this extraordinary catalysis comes with inherent challenges related to membrane-associated peptide hydrolysis. Here we established a system that allows expression and isolation of YqgP, a rhomboid homologue from Bacillus subtilis, as a soluble protein. Intriguingly, soluble YqgP is able to specifically cleave a peptide substrate that contains the transmembrane domain of Spitz. Mutation of the catalytic dyad abolished protease activity, and substitution of another highly conserved residue, Asn241, with Ala or Asp significantly reduced the catalytic efficiency of YqgP. We have identified the cleavage site that resides in the middle of the transmembrane domain of Spitz. Replacement of two residues that contribute to the scissile bond by Ala did not eliminate cleavage, but rather led to additional or alternative cleavages. Moreover, we have demonstrated that soluble YqgP exists as oligomers that are required for catalytic activity. These results suggest that soluble oligomers of maltose binding protein-YqgP complexes form micellelike structures that are able to retain the active conformation of the protease for catalysis. Therefore, this work not only provides a unique system for elucidating the reaction mechanism of rhomboid but also will facilitate the characterization of other intramembrane proteases as well as non-protease membrane proteins.