There are two types of titles in Japanese arts, teaching titles and organizational titles. Teaching titles are specifically awarded to instructors and bring with them various levels of authority within the system. It's as if they have they've replaced the old menkyo system (which some systems still award in addition to title and kyu/dan rank). So the question is, which titles mean what and how do you earn them?
Menkyo Shoden - First Level License
Menkyo Chuden - Middle Level License
Menkyo Joden/Okuden - Upper/Secret Level License
Menkyo Kaiden - License of Full Transmission
The holders of each menkyo were granted different authority to teach and pass on the system. Menkyo Kaiden was usually reserved for the inheritor of the art (but not always). This is because each clan generally had their own martial art, and the deepest secrets of the art would only be taught to the future headmaster. In addition to being teaching licenses, menkyo also functioned as initiations, meaning that once you earned one you were eligible for initiation into the next phase of the art.
After Kano introduced the kyu/dan system, however, numerous arts dropped the menkyo system in order to keep up with the times. Most koryu (founded pre-1868) arts kept the traditional menkyo system, however some also implemented the kyu/dan system as well and saved menkyo for their most dedicated students. Whether your art uses menkyo, kyu/dan or both is irrelevant because there's an entire system of ranking no one ever talks about.
There are numerous titles floating around the martial arts today, yet only a handful have historical precedents. Commonly used Japanese martial arts titles are:
Kohai/Senpai - Junior/Senior Student
Fuku Shidoin - Assistant Instructor
Shidoin - Instructor
Sensei - One Who Came Before
Shihan - Master Instructor
Renshi - Polished Teacher
Kyoshi - Senior Expert
Hanshi - Teacher of Teachers
Dojo-Cho - Head of Dojo
Kancho - Head of House (Chairman)
Kaicho - Head of Organization (President)
Soke Dai - Designated Inheritor
Soke - Head of Family (Headmaster)
Kaiso - Founder/Patriarch
Organizational titles are slightly more complicated. Regardless of your rank, your organizational title signifies your standing in that martial arts organization or system. For example, it doesn't matter what rank you are if you have been awarded a Kaicho title, you are the president of that association and have all of the authority necessary to run that association.
One of the most commonly misunderstood titles in the martial arts is Soke. Let me start by saying if you are the founder of your own system, you are NOT a Soke. You may choose to call yourself Shodai Soke (first generation headmaster), but in your case it is never acceptable to drop the "shodai" and simply use Soke. A more accurate title if you are the founder of the system is Kaiso. This is because Soke is most appropriately used to designate the iemoto, the family line following the patriarch. All future headmasters may use the title Soke, however the founder cannot. If you want to use the title Kaiso, however, there is a very specific process you must go through to be considered a legitimate founder. Like the rest of the titles in Japanese martial arts, it must be awarded to you, never assumed.
The Soke Dai is the person that the current headmaster has designated to become the next headmaster upon the current Soke's retirement or death. While the current Soke is still active, the Soke Dai functions as their "right hand," teaching in their stead, handling various situations before they reach the Soke, communicating on behalf of the Soke, etc. Essentially, they are an administrative assistant who will someday be the CEO. Regardless of their actual rank, they are regarded as the person holding the second highest standing in the art, subordinate to only the current Soke.
But why do titles supersede rank? In the case of organizational titles, it is because in order to carry out the duties of your position you need a certain level of authority. If you were limited by your kyu/dan rank, you may or may not be able to fulfill those duties. That being said, someone who holds either a Kaiso or Soke title is automatically void of rank. No rank is necessary as they are the headmaster of the system, with the ultimate authority to issue any documents they see fit, and rank only signifies your standing within that particular system. Therefore, their standing is already signified by their position as headmaster, making a kyu/dan rank irrelevant. An exaggerated example of this concept would be if an 8th kyu yellow belt was named as Soke Dai. Of course they would still have to progress through the ranks on their journey to becoming Soke, however when dealing with anything on an administrative basis they have the full authority of the Soke (with their permission) and can even sign off on high rank documents because of their position as Soke Dai. Upon the Soke's retirement or passing, that yellow belt would assume the headmaster position and it would be up to the high ranking instructors in the art to continue his/her education in the art. Yet that would not take away from their position as headmaster and authority to issue any documents they choose.
Rank in the martial arts has gotten out of hand, and I'd just as soon go back to the menkyo system because I feel it truly promotes the concept of training for the sake of training and not seeking any rank or title. Those who express the desire to teach will be awarded menkyo, and the rest will simply train. But that's not the world we live in, therefore like anything else the best tool we have is education; understanding rank's true purpose as simply a way for instructors to keep track of their students. Nothing more. Rank is only as valuable as the respect you have for the person you earned it from. Rank in one system does not automatically transfer as rank in another. Every system is unique and has their own standards for rank, and it's not up to you to discredit someone because they're requirements are different than yours.
And at the end of the day, the guy shoving a gun in your face doesn't care what rank or title you hold anyway...