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 a suicide attempt. Her 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), a World War II veteran recently evicted from a retirement home for snorting heroin, lives with the family; he is close with his seven-year-old granddaughter Olive (Abigail Breslin).
Olive learns she has qualified by default 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 van's mechanical problems. When the van's clutch breaks early on, they learn that they must push it until it is moving at about 15 mph (24 km/h) before putting it into second gear, at which point they have to run up to the side door and jump in. Throughout the road trip, the family suffers numerous personal setbacks, revealing their need for each other's support. Richard loses an important contract that would have jump-started his motivational business. Frank encounters the ex-boyfriend who, in leaving him for an academic rival, had led to his suicide attempt. Edwin apparently dies from a heroin overdose; to avoid being delayed by post-mortem arrangements, they smuggle his body out of the hospital. 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, and Frank tells him that he can never become a jet pilot with color blindness, which prompts Dwayne to break his silence and throw a tantrum. 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, Olive is almost refused entrance for arriving at the hotel four minutes late. As she gets ready, the family observes her competition: slim, sexualized pre-teen girls with highly styled hair, wearing lipstick, adult-like swimsuits, and glamorous evening wear to perform highly elaborate dance routines with great panache. It quickly becomes apparent that Olive (plain, pale, slightly chubby, wearing large eyeglasses, and untrained in beauty pageant conventions) is out of her league.
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. She joyfully performs the dance routine that her Grandpa Edwin had secretly choreographed for her: a burlesque performance to Rick James' song "Super Freak", innocently oblivious to the scandalized and horrified reaction of the audience and pageant judges. 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 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.