open up the headlight and by-pass the switch by disconnecting the leads running from it and jumpering the black/white main harness wire to a black lead. The bike should start and run normally. If it doesn't, you have wiring problems.
I've racked my brain and I just can't see how it could be the switch. The only electrical leads into it are the two contacts, and they're pretty well established right in the middle "run" position. I'll rerun a couple of pics to show how it goes together, but it would be real tough to get signal with the knob off the contacts.
Does this phenomenon occur at both "off" positions, or only one? Do all of the other electrical systems work correctly? Like the turn signals or brake lights"