Sheryl Hoover (Toni Collette) is an overworked mother of two children who lives in Albuquerque, New Mexico. Her gay brother Frank (Steve Carell) is a scholar of French author Marcel Proust, temporarily living at home with the family after a suicide attempt. Her arrogant, goal-obsessed husband Richard (Greg Kinnear) is striving to build a career as a motivational speaker and life coach.
Dwayne (Paul Dano), Sheryl's son from a previous marriage, is an unhappy fifteen-year-old who has taken a vow of silence until he can accomplish his dream of getting into the US Air Force Academy in order to become a test pilot. Richard's foul-mouthed father, Edwin (Alan Arkin), a World War II veteran recently evicted from a retirement home for using heroin, lives with the family. He is close with his seven-year-old granddaughter, Olive (Abigail Breslin).
When Olive learns she has qualified for the "Little Miss Sunshine" beauty contest that is being held in Redondo Beach, California in two days, she is ecstatic. However, money is tight and due to various logistical issues, the only way to make the trip is if the entire household goes. Despite Richard, Dwayne, and Frank in particular not wanting to go, they all band together to support Olive and embark upon the 800-mile road trip in their antiquated yellow Volkswagen T2 Microbus.
Family tensions play out during the journey, amidst the aging van's increasingly troublesome mechanical problems. When the van's clutch breaks early in the trip, the family discovers that they must push the van until it reaches 20 miles per hour and then run and jump in. The bus's horn eventually starts honking unceasingly by itself.
Throughout the road trip, the family suffers numerous personal setbacks, and discover their need for each other's support. Richard loses an important contract that would have jump-started his motivational business and saved the family from financial ruin. Frank encounters the ex-boyfriend who, in leaving him for Frank's chief academic rival (who has also just received a MacArthur Grant), precipitated his suicide attempt.
Edwin dies from an apparent heroin overdose. In order to reach their destination in time, the family smuggles his body out of the hospital, (illegally transporting it across state lines in the process), planning to make funeral arrangements after the pageant. During the final stretch of the trip, Dwayne discovers that he is color blind, and is therefore unable to be in the Air Force Academy, which prompts him to break his silence, refusing to continue with the trip and revealing his anger and disdain for his family. He storms from the van in tears, but is calmed down by a hug from Olive and returns to the family, apologizing for the things he yelled.
After a frantic race against the clock, Olive is almost refused entrance to the pageant when they find they've arrived four minutes after the registration deadline. When the uncaring and unfeeling pageant assistant refuses to budge, her coworker takes pity and offers to register her on his own time. As she gets ready, the family observes the other competitors: slender, sexualized little girls with highly styled hair, heavily made-up faces, spray tans, adult-like sexy swimsuits, and glamorous evening wear, performing highly elaborate dance, musical, and gymnastic routines with great panache. It quickly becomes apparent that Olive (plain, pale, slightly chubby, with unstyled hair, wearing large eyeglasses, and untrained in beauty pageant conventions) is not in their 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 prevent her from performing. Sheryl, however, insists that they shouldn't intervene, and Olive decides to go 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. The organizers are enraged and demand Sheryl and Richard remove Olive from the stage. Instead, one by one the members of the family join Olive on stage, dancing alongside her, and Richard prevents pageant officials from touching his daughter.
The family is next seen outside the hotel's security office where a police officer tells them they are free to leave as long as Olive never again enters a beauty pageant in the state of California. Richard tells Olive that her grandfather would be very proud of her, and the family happily piles into the ramshackle bus and heads back to their home in Albuquerque.