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--kube-apiserver-arg=allow-privileged=true

same as any other apiserver flag

So just:

ExecStart=/usr/local/bin/k3s \
    server --cluster-init \
    --kube-apiserver-arg=allow-privileged=true\

you probably want a space before the backslash, and to make sure there’s an empty line after that since you’ve got a trailing backslash, but yeah essentially