Hi Milly! Welcome to our forum!
I think I can clarify some of this for you.
When people are talking about generations and legacies, they are playing one family in the town for a long time. There's a popular challenge in which you have to get your family to the 10th generation while following a lot of rules and restriction.
If you want to play different families in the same town, you have to switch your active family through the Edit Town function found on the Main Menu. You can create other Sims to play in the same town or you can play existing Sims. The catch to this is that when you leave one family to play another, the first family will continue without you. They may get married, have babies, get jobs, etc. When you switch back to the first family, it can be very different. You also lose all of the promised wishes when you switch active families. And you lose the food in the refrigerator. However, your second family can interact with your first family, which is fun.
I hope this helps!