Little Miss Sunshine is the story of a few eventful days in the lives of the Hoovers, a family living in Albuquerque, New Mexico. Sheryl Hoover (Toni Collette) is an overworked mother of two. Her brother Frank (Steve Carell) is a Proust scholar, temporarily living at home with the family after having attempted suicide in the wake of a failed relationship. Sheryl's husband Richard (Greg Kinnear) is a Type A personality striving to help support the family as a motivational speaker and life coach. Dwayne (Paul Dano), Sheryl's son from a previous marriage, is a Nietzsche-reading teenager who has taken a vow of silence until he can accomplish his dreams of becoming a test pilot. Richard's 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 pageant that is being held in Redondo Beach, California in two days. The family, wanting to support her, quickly realizes that they all must accompany Olive to the pageant, getting there via an 800-mile 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 before it is put into gear, at which point they have to run up to the side door and jump in. Later, the van's horn malfunctions and begins honking continuously. The family suffers setbacks: Richard loses a big deal that would have jump-started his motivational technique business; Frank, in a convenience store buying pornography at Edwin's request, encounters the ex-boyfriend whose actions had prompted his suicide attempt; Edwin dies from a heroin overdose during the family's stay at a motel; Dwayne discovers that he is color-blind, which means he cannot become a pilot (a realization that prompts him to break his silence); and Sheryl's obsessive manner impedes her to attempt to keep everyone, including herself, calm and sane.

The climax takes place at the pageant, which features young hypersexualized girls with teased hair and capped teeth, wearing adult-like swimsuits and evening wear and performing elaborate dance numbers. Olive, untrained in beauty pageant conventions, is evidently out of place. Recognizing that Olive is a fish out of water whose feelings could really get hurt, the family considers withdrawing her from the competition; Sheryl nevertheless insists that they have to "let Olive be Olive" and participate.

In the talent portion of the pageant, the hitherto-unrevealed dance that Grandpa Edwin had choreographed for his granddaughter is revealed: To the tune of Rick James' "Super Freak," Olive scandalizes and horrifies almost all of the audience and pageant judges with a burlesque performance that she joyfully performs, as oblivious to the subtext behind the dance as the other contestants were to the provocative costumes and heavy makeup they were wearing.

When the pageant director approaches Sheryl and Richard to insist on the immediate removal of Olive from the stage , they, along with Frank and Dwayne, instead join Olive on the stage and dance alongside her.

The family is next seen outside a police officer's office. They are free to go on condition that Olive never take part in a beauty pageant in California ever again. They pile into the van and, with the horn still honking, smash through the barrier of a toll booth that the pageant official had stopped at, laughing together as they go. The movie cuts to black with the horn, still broken, sounding as the family heads back to Albuquerque.