The sprocket usually goes next to the wheel, like you have it, because that's where the original sprocket would have been. It can be reversed, like in Tony's photo, moving the sprocket farther out, to accommodate a wider tire and/or wider engine (if the frame allows).
https://www.bmikarts.com/Baja-Doodlebug-Sprocket-Adapter-Plate_p_7093.html
Check your sprocket alignment using a straightedge.
No offense but that's a cheap sprocket, but it's what most places sell. By cheap, I mean that it's a stamped sprocket. A stamped sprocket typically will have slightly rounded edges on one side and rather sharp edges on the other. High quality sprockets are hobbed (machined) and have chamfered teeth for smoother engagement. I was fortunate to find a few NOS #35 AFAM split sprockets a couple of years ago at great prices. AFAM (former name, recently changed to Drive Systems) has made some of the best motorcycle sprockets and chain for years but no longer make the #35 sprockets.
If your sprocket alignment is good, you could try chamfering the sprocket teeth. To do that, I would use a sanding disc, held lightly against the teeth while the sprocket is spinning. WARNING: This could be slightly dangerous if you're not accustomed to doing such things. Another option would be to have a machine shop chamfer the teeth but that would probably cost more than buying a high quality sprocket.