When you use Biztalk with a separate SQL Server all security is managed through domain accounts and groups. The SQL Server databases make extensive use of these groups and accounts.
Back on Biztalk 2004 I managed to setup Biztalk and SQL on separate servers using local machine accounts and groups and synchronising passwords. This took significant effort and was very fragile. Any change would cause Biztalk to fail dramatically and would take a long time to diagnose and correct. I have never been silly enough to do it again.
I would suggest you use a SQL Server that is in the same domain as your Biztalk server.