If there's only one o-ring, put it on the outside so you can visually inspect it to make sure it isn't over tightened. (If you over tighten, the gasket will look squished out unevenly. It should be flush with the ridge on the spigot or very slightly bulging evenly around.)
You'll want to check the seal before you fill it with beer, and never store the bucket with the spigot tightened. Over time the shank will stress from the pressure you're putting on it and crack. (And it really sucks to find out after you've transferred 5 gallons of beer into the bucket that your spigot is pouring out your beer.)