Sheryl Hoover is an overworked mother of two children, who lives in Albuquerque, New Mexico. Her brother Frank is a gay scholar of French author Marcel Proust, temporarily living at home with the family after a suicide attempt. Her husband Richard is striving to build a career as a motivational speaker and life coach. Dwayne, Sheryl's son from a previous marriage, is a troubled teenager who has taken a vow of silence until he can accomplish his dream of becoming a test pilot. Richard's foul-mouthed father Edwin, a World War II veteran recently evicted from a retirement home for using and selling heroin, lives with the family; he is close with his seven-year-old granddaughter Olive.
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 during the journey, amidst the aging van's increasingly evident mechanical problems. 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. Frank encounters the ex-boyfriend who, in leaving him for an academic rival, 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, planning to make funeral arrangements after the pageant. During the final stretch of the trip, 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 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 and returns to the family following a hug from Olive.
A Volkswagen T2 Microbus, similar to the one in the film
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, musical, and gymnastic 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 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.
The family is next seen outside the hotel's security office where a police officer tells them that 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 van and head back to their home in Albuquerque.