Usually the S-Video takes preferance (so if there's a signal on it or, in some cases, even if it's just plugged in the composite connection will be disabled).
If I do this, will the S-video out of the VCR still
work even if the source was only was a component
input.
I believe the VCR should covert. However, it depends here on how its input logic works. You may need to buy a new/different switcher that upconverts all composite input signals to S-Video.
Can I record in S-VHS even with a composite source?
Yes. Recording format has nothing to do with the physical connection you're using (S-Video, composite, TV, etc.)