Starting as a Proprietor: Udyam Registration, the 45-Day Payment Rule and When an HUF Makes Sense
Most businesses in India start as sole proprietorships. The owner and the business are one person, so there is no separate incorporation. A few registrations make a real difference, though. Udyam is one of them.
MSME classification from 1 April 2025
The thresholds for classifying enterprises were raised from 1 April 2025. A business is classified on both investment in plant and machinery (or equipment) and turnover:
| Category | Investment up to | Turnover up to |
|---|---|---|
| Micro | ₹2.5 crore | ₹10 crore |
| Small | ₹25 crore | ₹100 crore |
| Medium | ₹125 crore | ₹500 crore |
The figures are taken from the enterprise's income tax return and GST data. Exports are excluded from turnover for classification.
Why Udyam registration matters
Priority-sector credit and CGTMSE cover. Banks extend collateral-free loans to micro and small enterprises under the Credit Guarantee Fund Trust scheme. A Udyam certificate is the starting point.
Protection against delayed payment. Under Section 15 of the MSMED Act, a buyer must pay a micro or small supplier within the agreed period. That period cannot exceed 45 days from acceptance of the goods or services, and it is 15 days where there is no written agreement. Delayed amounts carry compound interest at three times the RBI bank rate, and the supplier can go to the MSME Facilitation Council (Samadhaan).
The tax rule that changed buyer behaviour. From FY 2023-24, the Income-tax Act allows a buyer to deduct amounts owed to a micro or small enterprise only in the year they are actually paid, if they are paid after the time limit under Section 15. This rule was formerly Section 43B(h) of the 1961 Act and is carried into the Income-tax Act, 2025. As a result, larger buyers now ask suppliers for their Udyam status and plan payments around it. Note: the protection applies to manufacturers and service providers. Traders registered on Udyam are not covered by the delayed-payment provisions.
Registrations a proprietorship typically needs
- GST registration if turnover crosses the threshold or the business makes inter-state supplies (see our GST registration article)
- Udyam registration
- Shop & Establishment registration under the state law, and a trade licence from the local body where required
- Current account in the trade name, for which banks usually accept two of the above
When a Hindu Undivided Family makes sense
An HUF comes into existence automatically in a Hindu family. It becomes a separate taxpayer once it has property of its own and a PAN. It gets its own basic exemption limit and can claim its own deductions.
Legitimate uses include:
- Holding ancestral property or property received on partition
- Receiving gifts from relatives in the HUF's name, including on the marriage of a member
- Holding family investments separately from individual income
Points to watch. If an individual member transfers their own property to the HUF without adequate consideration, the income from that property is clubbed back with the member's income. On partition, assets go to coparceners, and since 2005 daughters are coparceners too. The Karta has wide powers of management, so the family should document decisions.
An HUF is not a tool for converting personal income into family income. Used for the purposes above, it is a recognised and useful structure.
The information in this article reflects the law as on the date of publication and is for general guidance only.