Sheryl Hoover (Toni Collette) is an overworked mother of two children, who lives in Albuquerque, New Mexico. Her brother, Frank (Steve Carell), is a homosexual scholar of French author Marcel Proust, temporarily living at home with the family after having attempted suicide. Sheryl's husband Richard (Greg Kinnear) has a Type A personality, and is striving to build a career as a motivational speaker and life coach. Dwayne (Paul Dano), Sheryl's son from a previous marriage, is a Nietzsche-reading troubled teenager who has taken a vow of silence until he can accomplish his dream of becoming a test pilot. Richard's foulmouthed father Edwin (Alan Arkin), recently evicted from a retirement home for snorting heroin, lives with the family; he is close to his seven-year-old granddaughter Olive (Abigail Breslin).
Olive learns she has qualified for the "Little Miss Sunshine" beauty contest that is being held in Redondo Beach, California in two days. Her parents and Edwin, who has been coaching her, want to support her, and Frank and Dwayne cannot be left alone, so the whole family goes. Because they have little money, they go on an 800-mile (1,287-km) road trip in their yellow Volkswagen T2 Microbus.
Family tensions play out on the highway and at stops along the way, amidst the aging VW van's mechanical problems. When the van breaks down early on, they learn that they must push the van until it is moving at about 20 mph (32 km/h) before it is put into gear, at which point they have to run up to the side door and jump in. Throughout the road trip, the family suffers numerous setbacks. Richard loses an important contract that would have jump-started his motivational technique business. Frank encounters the ex-boyfriend who, in leaving him for an academic rival, had prompted his suicide attempt. Edwin dies from a heroin overdose, resulting in the family smuggling the body out of a hospital because an administrator will not allow them to store the body in the hospital while they continue on to the pageant. A policeman stops the car due to a damaged and continuously honking horn and nearly discovers Edwin's body in the back of the van. Dwayne discovers that he is color blind which means he cannot become a pilot, a realization that prompts him to break his silence. Throughout the ordeal, Sheryl attempts to keep everyone, including herself, calm and sane
The climax takes place at the beauty pageant. After a frantic race against the clock the family arrives at the hotel, and are curtly told by a jobsworth pageant organizer that they are a couple of minutes past the registration deadline and therefore Olive cannot enter the competition. Fortunately, a sympathetic hired hand intervenes and offers to register Olive. At the hotel the family observes Olive's competition: slim, hypersexualized pre-teen girls with teased hair and capped teeth. They wear lip gloss, adult-like swimsuits, and glamorous evening wear to perform highly elaborate dance routines with great panache. It quickly becomes apparent that Olive (plain, chubby, wearing large eyeglasses, and untrained in beauty pageant conventions) is a mere amateur by comparison.
As Olive's turn to perform in the talent portion of the pageant draws near, Richard and Dwayne recognize that Olive is certain to be humiliated and, wanting to spare her feelings, run to the dressing room to talk her out of performing. Sheryl, however, insists that they "let Olive be Olive", and Olive goes on stage. Olive's hitherto-unrevealed dance that her Grandpa Edwin had choreographed for her is performed to Rick James' song "Super Freak". Olive scandalizes and horrifies most of the audience and pageant judges with a burlesque performance that she joyfully performs while oblivious to their reactions. The pageant organizers are enraged and demand Sheryl and Richard remove Olive from the stage. Instead of removing her, one by one the members of the Hoover family join Olive on stage, dancing alongside her to show their support.
The family is next seen outside the hotel's security office where a police officer gives them their freedom in return for a promise never to enter a beauty pageant in the state of California again. Piling into the van with the horn still honking, they happily smash through the barrier of the hotel's toll booth and head back to their home in Albuquerque.