Most faction systems I've seen are pretty simplistic. Usually the game has a few opposing factions and you can only join one, or the game has lots of factions and you can join several, even though some combinations make no sense.
Typically your character has a reputation, a level of experience and a rank in each faction, but these are all independent elements that rarely interact. The way I see it the character would actually have a reputation within each faction that is not tied to rank, although having a good reputation would usually be needed to rise in rank (except where you can advance through intrigue). What I am getting at is probably best explained by an example:
Take the character "Limorkil" who is primarily a fighter but who also has some thief/assassin type skills. Let's say he is publicly a member of the Radiant Order, a do-good, combat oriented faction. He is also a member of the Night Blades, a secretive assassin's guild. Initially, being a complete nobody, he can do work for both factions and keep his alliegence to one faction hidden from the other. As he helps one faction he gains a reputation with that faction and possibly increases in status. The Radiant Order membership does not mingle with underworld types, so Limorkil can go for some time without being discovered. However, as he increases in status within a faction Limorkil would expect to come under increasing scrutiny from those of higher status, and he would also acquire rivals within the faction. Both of these groups are going to pay more careful attention to his activities and, particularly with the higher status individuals, there is going to be more and more chance that Limorkil's alliegence to two somewhat opposing factions will be discovered, to his cost. He may even end up enemies of both factions, since neither are likely to trust him. At the very least he is going to have to choose between them, and carry out a mission for one faction against another to prove his loyalty.
My point is that factions should not just be clubs that give you discounted prices, access to training and spells, etc. They should be a roleplaying opportunity. Being a high status member of a faction should get you friends and enemies, both inside the faction and outside. At higher status levels you should be able to get help from the faction and give orders to the lower ranks. Becoming the head of the faction should be very hard, if not impossible. In fact, it makes very little sense for a questing adventurer type to be the head of most factions. The head of a faction is a totally different role, with its own objectives and responsibilities.
As for what a faction does for you, here are some possibilities:
- Access to NPC companions that would not otherwise be available
- Ability to hire (or borrow) retainers
- A place to live, or a place to store items at least
- Protection from the law, or from enemies
- Assistance from people in power allied to the faction
- Hindrance from people in power who are enemies of the faction
- Access to lore/secrets/info otherwise unavailable
- Special skills that are only taught to higher status faction members
- Ability to have faction craftsmen make special items for you, or to send lower ranking members to find something for you
- Ability to command and control faction activities against otherfactions (for example: assassinations, guild wars, kidnappings, trade agreements.)
Some of the above ideas are fairly complex, and you would almost need a game devoted to faction advancement to make the best of them. At the very least, faction membership in any game should give you the feeling that you have made some friends who will help you and acquired some enemies who will hinder you.