Theorell, who was born at Linköping in Sweden, received his MD from the Karolinska Institute in Stockholm in 1930. However, he did not pursue a career in medicine because of a polio attack. Instead, he became assistant professor of biochemistry at Uppsala University (1932–33, 1935–36), spending the intervening years with Otto Warburg at the Kaiser Wilhelm Institute in Berlin.

Theorell found that the sugar-converting (yellow) enzyme isolated from yeast by Warburg consisted of two parts: a nonprotein enzyme (of vitamin B₂ plus a phosphate group) and the protein apoenzyme. He went further to show that the coenzyme oxidizes glucose by removing a hydrogen atom, which attaches at a specific point on the vitamin molecule. This was the first detailed account of enzyme action.

Theorell studied cytochrome c (important in the electron-transport chain) and was the first to isolate crystalline myoglobin. His research on alcohol dehydrogenase resulted in the development of blood tests that may be used to determine alcohol levels.

In 1937 Theorell became director of the biochemistry department of the Nobel Medical Institute, Stockholm, and in 1955 received the Nobel Prize for physiology or medicine.