Additional comments about Security...
You can have several document libraries in one site, that is also a way to separate security/permissions. There is a commercial third party tool available for SharePoint that allows you to set permissions by the use of metadata. So, if you're interested in
that, you can investigate further.
Try and keep the folder hierarchy as flat and minimal as you can, but don't limit yourself to metadata views exclusively. Mix the opportunities for the best results! If you choose to depend on metadata only,
you should separate sets of documents by putting them in its own websites and set the permissions on this level. If you need a more granular rights management, folders/libraries are the easier way to do it.
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Great article Margriet! The folder versus metadata discussion is one that I think divides the SharePoint community for many years now. I have been in the "folder" camp now for the past 4 years. As a functional specialist I work with SharePoint now for ten years and I have seen to many businesses starting with metadata very enthusiastically but returning to folders after 1 or 2 years. The reason is very simple: it’s just too much work on a daily basis to add metadata to every single file you upload. I think location based default metadata properties on folders is a very good compromise. People are also just used to working with folders, and why change anything you are so comfortable with.
I would like to add a little bit to your discussion, first the disadvantages you mention:
1. I think the full text search of SP2013 is so great that you will find any file you are searching for with or without any added metadata. And if you choose not to go for “adding metadata route” as a business, you should know that Sharepoint automatically adds metadata anyway to your documents. The document name, document type, folder name, created by, modified by etc. Sharepoint adds about 20 metadata to your documents automatically without you having to do a thing. So in fact you are always using metadata.
2. I agree you can "loose" a document when it is placed in the wrong folder. But you can also "loose" a document when the wrong metadata is added. Again, i feel a good search engine will solve both issues.
Furthermore I would like to add some disadvantages to metadata use:
1. Besides the time needed to add constantly new metadata to individual documents, there is no decent way to add or change metadata in bulk when its Term Store metadata. The Datasheet view options are greyed out when using the term store. Are you really going to ask you end-users to add metadata to individual documents when they want to move 50 documents from file share to SharePoint on any given day? Do you really want to use third party migration software for every instance that this occurs?
2. Of course it is best practice not to create too many folder levels, but metadata grouping can only give you 2 levels of "folder like" structure. Sometimes you just need 3 levels to make the document structure logic for everyone.
The big disadvantage of folders however is the one you already mentioned: when you add a library web part view on a page, there is no way to tell in which folder you are at any given time, there is also no way to navigate to the parent folder. I have invested in custom work to give me library web part views that do show a breadcrumb on the SP2010 portals I rolled out in the last 2 years. And that has taken away the biggest disadvantage of using folders for my end-users.
Great comments, processed them in the Wiki article!