Molly Milkovich is the half sister of Mandy, Mickey, and the other Milkovich children. She first appears in season three when she calls the Milkovich house trying to contact her father, Terry, claiming that her mother has died. Lip convinces a reluctant Mandy to go and get her, and Molly then stays with the Gallaghers while Mandy tries to figure out what to do with her.
At the end of the first episode in which she appears, it is revealed that Molly is not, in fact, a girl, but born male and raised as a girl by her mother. She is seemingly oblivious of this situation by saying, "Oh yeah. That's just my girl penis". When Debbie says it looks exactly like a boy penis, Molly adds, "But I'm a girl, so it's different".
Fiona prompts Mandy to tell Molly the "truth" about her gender, but when Mandy doesn't, Fiona eventually tells her, "You're not a girl, honey. You're a boy who was raised by a jacked up meth head of a mom, who made you think you are a girl, because she hates men". 
When the Gallagher children are all taken into foster care  it is unclear where Molly goes, but then in that same episode Mandy tells Lip that Molly's mother had turned up; it turns out she was not dead at all, and that Molly had run away. Lip expresses concern that Mandy simply let Molly's mother take her, claiming Molly must have had a reason to run away. However, he eventually drops the issue. A deleted scene with Molly's mom implies that Molly was abused as she is scared to go with her.