Value

Meaning

Web Application

Creates an ASP.NET Web Application project, which manages all files through a standard Visual Studio project file, and provides integration with the MSDeploy tool which works with IIS6 and IIS7 and is bundled with VS2010 and VS2012 (separate download for VS2008).

For targeting VS2010 SharePoint applications, the Web Application is recommended, as the WebDeploy project settings can provide enhanced and simplified deployment to the SharePoint server.

Web Site (default)

The Web Site project type, introduced with ASP.NET 2.0 and Visual Studio 2005 uses a "loose" file management scheme, where ASPX and ASPX.cs code-behind files are automatically compiled into runtimes for use by IIS.

There are nice, automatic things that happen with the Web Site type, but there is also a loss of control over how resources are managed, particularly when it comes time to deploy to a test or production web server.