Culling removes Sim relationships from your game to keep the total number of sim relationships down. Really short version is that it removes Sims that active sims do not have (much) relationship with. Once a Sim is culled, your sim forgets them completely.
You can protect Sims that you do not actively play from being culled by making sure that they are in the "My households" section of the neighborhood manager. Only Sims in the "Other Households" are fair game for being culled.
And yes, I have it on, though I set the upper limit to "unlimited" and have MCCC set to do the culling rather than letting EA's culling do the job. Playing without culling on, long term, puts you at risk for the save game in question becoming unstable or potentially even completely broken and certainly impacts performance...eventually.