Created once a player is all in and other players continue betting "on the side" (literally). The side pot is distinct from the main pot in that only the players still betting play for it, while the all-in player can only win the main pot. If there are multiple all-in players, multiple side pots can potentially be created.
For example, in a $1/$2 no-limit hold'em game, Player A raises to $8 from early position, then Player B reraises all in with his last $20 from the cutoff seat. Player C then calls the reraise from the button, the blinds fold, and Player A calls as well. The main pot having been created, Players A and C will then bet into a side pot after the flop if they wish.