Creating a Chaos Chao is a long process. In order for a Chao to become a Chaos Chao, it needs to have reincarnated (or "transformed", as the game calls it) at least twice. How the player raises the Chao in its previous lives has absolutely no impact on whether or not a Chao can become a Chaos Chao. After a Chao transforms for the second time, the player can give it at least one of every small animal in the game. The player can still feed it fruit, and should do so to keep their Chao happy. If all of the requirements are met, when the Chao evolves, it should come out of the cocoon as a Chaos Chao.
Chaos Chao have many unique traits. They are immortal, never reincarnating nor dying. Chaos Drives and small animals do not affect the appearance of Chaos Chao, though they can still come in different colors. Chaos Chao also cannot mate. Though their behavior remains the same before they transformed, they can no longer change their facial expressions with the exception of falling asleep and having their nap interrupted and are still able to blink.
A Neutral Chao will evolve into a Light Chaos, a Dark Chao will evolve into a Dark Chaos and a Hero Chao will evolve into Hero Chaos. These Chao have an ominous, organ-like jingle when they transform.
Contrary to popular belief, giving a Chaos Drives or extra small animals does not prevent the Chao from becoming a Chaos Chao. This, however, should not be abused, as a Chao must still evolve into a Normal Type (in other words, the Chao must have used the small animals/Chaos Drives in balanced matter: ten red Chaos Drives, ten purple, etc.).