Document flow

I need few advices on what is best practice for implementing flow of document in SharePoint.

Situation in real life is (in short):

1. Real (paper) document travels from user to one institution.

2. In this institution, it is assigned to a person who works on that document.

3. Then it goes on to a second institution (by mail), another person is assigned to it and he/she changes the document.

4. Inside that second institution document goes between departments to get approvals or changes.

5. It goes back to first institution, is approved and then back to user.

Now, I am interested what is common practice for this scenario. I will use workflow in this case, but I am interested is it better to keep document in one library, in one folder, and then all users would access to that document in that library (which demands changes on document’s permissions) or is it better for document to travel between different libraries as it changes its state?

Are there some good articles that speak about document flow?