@tmedani is more competent to address the issues related with the coordinate system used in SimNIBS. I'll try to address your more generic questions about the Brainstorm workflow.
It seems the atlas can be transformed to the subject space, does that mean I can do this for each subject and then analyze the time series for my group analysis instead of creating a group grid?
What do you mean with "the atlas can be transformed to the subject space"? What properties are you interested in? How are you planning to do your source analysis?
If you are only interested in specific ROIs that you know how to define for each of your subject, indeed you don't need to have the full source maps available in the template space.
If I create a group grid, does my FEM mesh(different space issue in Question 1) will be automated coregistered with the template correctly?
The FEM mesh stays only at the subject-level.
The correspondence between the subject and the template brain (default anatomy) are only established for the source space (= the points where you estimate the sources = the group grid, which is independent from the tetrahedral meshing of the head tissues).
For example, I make the head model based on 256 channels, but cleaned EEG recording may have just 230 channels, would it still work with the head model when estimating the source?
The forward model ("head model" file in Brainstorm = linear model that gives the value of each electrode independently based on the values of the sources) is estimated for all the electrodes.
When estimating the sources, only the good channels are selected to compute the inverse model. You should get a dialog box asking you to confirm the list of channels to exclude from the source modeling.