It works so good, it even works when the run switch is in the OFF position!
That pretty normal, George. The Stop Run Stop switch controls power to the coils, or whether the engine is capable of running. Really not much to do with the starter circuit.
What you have to be careful with, is leaving the engine in gear with the clutch out. The 500K1/K2 control had no interlock capability. If, for example you left the bike in gear on the sidestand, the starter motor will make the bike lurch forward, possibly knocking it off the stand.
In 74, they began making interlocks to prevent that (starter motor safety unit). By the K3 version, the bar control had changed to route power instead of gnd to the solenoid, so the neutral switch and the clutch switch could be utilized as the safety unit(s). So, as I mentioned earlier, the mod wiring I recommended to get you going reverts the the safety features of the 500K1/K2 model (none).
The H/L headlight selector switch is common on the K3 550 (all F models, too.)
I really think you would be better off getting a CB550 K3 right bar control. Then you could re-enable the neutral and clutch safety devices.
But, it's your bike and you should do what pleases you.
Cheers,