MSDN explains this:
In Visual Studio you can create Web application projects or Web site projects. Each type of project has advantages and disadvantages, and it is helpful to understand the differences between them in order to select the best project type for your needs. You must select the appropriate project type before you create a project, because it is not practical to convert from one project type to the other.
Scenarios in which Web application projects are the preferred choice include the following:
- You want to be able to edit code without stopping a debugging session.
- You want to run unit tests on code that is in the class files that are associated with ASP.NET pages.
- You want to refer to the classes that are associated with pages and user controls from standalone classes.
- You want to establish project dependencies between multiple Web projects.
- You want the compiler to create a single assembly for the entire site.
- You want control over the assembly name and version number that is generated for the site.
- You want to use MSBuild or Team Build to compile the project. For example, you might want to add pre-build and post-build steps.
- You want to avoid putting source code on a production server.
- You want to use the automated deployment tools that are available in Visual Studio 2010.
Scenarios in which Web site projects are the preferred choice include the following:
- You want to include both C# and Visual Basic code in a single Web project. (By default, a Web application is compiled based on language settings in the project file. Exceptions can be made, but it is relatively difficult.)
- You want to open the production site in Visual Studio and update it in real time by using FTP.
- You do not want to have to explicitly compile the project in order to deploy it.
- If you do precompile the site, you want the compiler to create multiple assemblies for the site, which can include one assembly per page or user control, or one or more assemblies per folder.
- You want to be able to update individual files in production by just copying new versions to the production server, or by editing the files directly on the production server.
- If you precompile the site, you want to be able to update individual ASP.NET Web pages (.aspx files) without having to recompile the entire Web site.
- You like to keep your source code on the production server because it can serve as an additional backup copy.
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