Inspired by an article published in L. Neil Smith's online magazine The Libertarian Enterprise on 23 July, 2001, Jason Sorens, a Ph.D. candidate at Yale University at the time, argued that the thinly scattered libertarian activism was failing. His conclusion was that it would be necessary for libertarians to geographically concentrate their efforts in order to achieve "liberty in our lifetime." As a result, the Free State Project was founded on September 1, 2001.

When the FSP surpassed 5,000 members in August, 2003, a vote was held to choose the state. The ten candidates were (alphabetically): Alaska, Delaware, Idaho, Maine, Montana, New Hampshire, North Dakota, South Dakota, Vermont, and Wyoming. These states were chosen because of their low populations (under 1.5 million), relatively pro-libertarian native cultures, lack of dependence on federal funds, and decent job markets. The voting process used a Condorcet method to determine which state was most preferable to the most people. On 1 October, 2003, it was announced that New Hampshire had been chosen as the Free State (Wyoming came in second). The vote was certified by Alan R. Weiss of ECL / Synchromesh Computing of Austin, Texas as fair and unbiased. As part of the certification process, individual members of the FSP could also view their ballots on-line so that they could self-verify their vote.

Following the vote, the focus of the FSP shifted toward recruiting another 15,000 members to commit to the move to New Hampshire. Once membership reaches 20,000, all members are supposed to move within five years. There is no obligation to move until and unless 20,000 members are reached, but many members expressed their desire to move before that time. Early in 2004, Amanda Phillips was named President of the FSP. Amanda Phillips resigned in March 2006[5], and was replaced by Varrin Swearingen. Jason Sorens continues to remain active as Chairman of the Board of Directors.

After moving to New Hampshire, members have pledged to "exert the fullest practical effort toward the creation of a society in which the maximum role of civil government is the protection of life, liberty, and property." Most (but not all) plan to work within the political system to reduce the size and scope of government through reductions in taxation and regulation, reforms in state and local law, an end to federal mandates, and a restoration of what they see as constitutional federalism. Others include anarcho-capitalists who oppose taxation altogether. The Free State Project itself is non-partisan and non-political and does not take any stance on issues.