My WP site has 2 custom post types, "Projects" and "People". There can be unlimited number of "People" per project and I'm thinking about a way to integrate the projects section with "People" section. My first impression was using custom taxonomies. But the problem is, is there a way to set a relationship between these 2? If custom taxonomy is the only way, is there a way to make it so when adding new people custom taxonomy get created as well?
As you haven't stated your requirements of People type and Project type. So I am assuming that you must have both as a post type. To create relations between them you can use @scribu's Post 2 Post relations plugin.