In this paper, we address a multiple-input multipleoutput (MIMO) communication system based on generalized spatial modulation (GSM) and dual-polarized (DP) antennas in sub-TeraHertz (sub-THz) bands to improve the Spectral Efficiency (SE) while reducing the spatial correlation effect and the space occupancy. Moreover, the joint Maximum Likelihood (ML) detector and a Modified Ordered Block Minimum Mean-Squared Error (MOB-MMSE) detector algorithm are proposed to detect jointly the complex symbols and the virtual bits conveyed by the activated polarization and the transmit antenna combination index. MOB-MMSE can achieve near-ML performance with low complexity. The performance of DP-GSM system over correlated Rayleigh/Rician fading and indoor sub-THz channels is studied. Provided results show that DP-GSM system is robust to the spatial correlation effects under Rician fading channel. In addition, an average bit-error probability (ABEP) upper bounding is derived and analyzed for the DP-GSM system over correlated Rayleigh/Rician fading channels. Since the sub-THz band suffers from many technological limitations and severe RF-impairments such as low transmit output power and important phase noise (PN), the DP-GSM system is studied by considering the sub-THz impairments. Moreover, the Dual Polarized Spatial Multiplexing (DP-SMX) and the Uni-Polarized GSM (UP-GSM) are compared with the DP-GSM system. The results reveal that DP-GSM with low order modulation schemes as QPSK outperforms the UP-GSM. Besides, DP-GSM and DP-SMX provide a good performance up to medium PN, which is interesting for sub-THz bands, but DP-GSM can reduce the transceiver cost by using a lower number of RF chains when the used transmitter architecture is based on RF-switching.