I have two DNS-343s and all 8 HDDs are formatted as standard volumes (NAS1 backs-up NAS2). The DNS-343 uses software RAID. For this reason and other issues I've seen around these forums, I've opted to steer clear of RAID 5.
You can upgrade the firmware with or without the HDDs installed. The firmware upgrade is completely independent of the HDDs, HDD formatting, HDD data, and DNS-343 user configurations (i.e. passwords, sharing,etc.), and therefore should have no impact if you leave the HDDs where they are. If you choose to remove the HDDs, make sure you re-insert each drive in the same slots they are currently located. The DNS-343 will not recognize the Volumes if you put the HDDs back in the wrong order. You should label the HDDs with a marker as you remove them so you know the slots they came from.