Im curious about the offset sprocket too as I'm putting a K5 sprocket on a K7 motor and frame (its brand new and what I have). Is this possible? Will I have to mill some of this sprocket off?
I think our issues are little different. When you say "K5 Sprocket", I assume you mean a 530 as opposed to 630. The 530 sprocket is a little "fatter" where it goes on the shaft. I have heard that people just tighten down the center bolt and are okay. If you want some float (which I think was intended for the 530 setup), you can "build out" where the bolt and washer tighten down with one or more washers. The way the K7 with 630 setup works baffles me a bit because I believe the sprocket is intended to be held down tightly to the shaft with the single bolt and washer. The 530 seems to be engineered to float a bit.
My problem is that I'm out of alignment. Your alignment should be perfect. If you look at the following picture (530 left and 630 right), you'll note that the "height" of these two sprockets is different - 530 being taller. They are both "engine side down". The teeth centers (also center of chain) line up perfectly. So, I think you're okay. The extra height of the sprocket is all on the "outside" of the center-line of the chain.

I'll wait for others to comment