Project reference vs. DLL Reference - Which is better?

If you only have the dll then you're stuck with a dll reference (obviously).

If you have the source then it's usually better to use a project reference. There might be cases where you have a utility library that's never going to change, but if there's the slightest chance of you needing a bug fix then having a project reference is going to make debugging a lot easier.

It's not much of a choice. If you have a solution with both projects then use a project reference. If your solution doesn't have the project then you have to use an assembly reference.

So the real question should probably be: do I create a solution with both projects? Yes, as long as the project is still in the debug stage and liable to require bug fixes.