Finite-state reasoning, the ability to understand and implement state-dependent behavior, is central to hardware design. In this paper, we present LLM-FSM, a benchmark that evaluates how well large language models (LLMs) can recover finite-state machine (FSM) behavior from natural-language specifications and translate it into correct register transfer-level (RTL) implementations. Unlike prior specification-to-RTL benchmarks that rely on manually constructed examples, LLM-FSM is built through a fully automated pipeline. LLM-FSM first constructs FSM with configurable state counts and constrained transition structures. It then prompts LLMs to express each FSM in a structured YAML format with an application context, and to further convert that YAML into a natural-language (NL) specification. From the same YAML, our pipeline synthesizes the reference RTL and testbench in a correct-by-construction manner. All 1,000 problems are verified using LLM-based and SAT-solver-based checks, with human review on a subset. Our experiments show that even the strongest LLMs exhibit sharply declining accuracy as FSM complexity increases. We further demonstrate that training-time scaling via supervised fine-tuning (SFT) generalizes effectively to out-of-distribution (OOD) tasks, while increasing test-time compute improves reasoning reliability. Finally, LLM-FSM remains extensible by allowing its FSM complexity to scale with future model capabilities.