Hi Lauren,
You would check the box if the URL of the destination is not the same as the URL of the source site. So, it would still be checked when cloning into a subdomain. (If in doubt, always check it - the only bad thing that happens if it was not needed is that the operation is slower than it would have been).
Yes, you need too set up the destination website (i.e. an empty WordPress install) and UpdraftPlus first.
UD will handle the child theme.
David