In recent years, the increasing need for energy conservation and environmental protection has driven industries to explore more efficient and sustainable processes. Liquid–liquid extraction (LLE) is a common method used in various sectors for separating components of liquid mixtures. However, the traditional use of toxic solvents poses significant health and environmental risks, prompting the shift toward green solvents. This review deals with the principles, applications, and advantages of aqueous two-phase systems (ATPS) as an alternative to conventional LLE. ATPS, which typically utilize water and nontoxic components, offer significant benefits such as high purity and single-step biomolecule extraction. This paper explores the thermodynamic principles of ATPS, factors influencing enzyme partitioning, and recent advancements in the field. Specific emphasis is placed on the use of ATPS for enzyme extraction, showcasing its potential in improving yields and purity while minimizing environmental impact. The review also highlights the role of ionic liquids and deep eutectic solvents in enhancing the efficiency of ATPS, making them viable for industrial applications. The discussion extends to the challenges of integrating ATPS into biotransformation processes, including enzyme stability and process optimization. Through comprehensive analysis, this paper aims to provide insights into the future prospects of ATPS in sustainable industrial practices and biotechnological applications.